Monday, 8 June 2020

Historical Background of Agricultural Income Tax in India


Agricultural Income Tax in India has a long history starting from the sixties of the 19th Century when following the British pattern, agricultural income was included in the Income Tax as per the provisions of the Income Tax Act, 1860. This arrangement continued till 1886 and thereafter up to 1935, agricultural income was completely exempted from the taxation.
The Federal Finance Committee of the Round Table Conference (1932) considered the possibility of the provincial Government raising revenue from taxation of agricultural income and recommended that the power to tax agricultural income should be given to the provinces. This recommendation was accepted which ultimately became a part of the Indian Constitution in 1950.

Background of Agricultural Income Tax
Except for two short periods of nine years in all (1860 to 1865 and 1869 to 1873) agricultural incomes have been exempt from the general income-tax and, till recently, from any income-tax. The Indian Taxation Enquiry Committee observed in 1925:
“There is no historical or theoretical justification for the continued exemption from the income-tax of income® derived from agriculture. There are, however, administrative and political objections to the removal of the exemption at the present time. There is ample justification, for the proposal that incomes from agriculture should be taken into account for the purpose of determining the rate at which the tax on the other income of the same person should be assessed, if it should prove administratively feasible and practically worthwhile.”
The exemption of agricultural income continued till the year 1935. The Government of India Act passed in that year empowered the provinces to levy taxes on agricultural income. The States have retained this power under the Constitution of India adopted in 1950.
But the position remained unchanged until the passing of the Government of India Act of 1935; and the actual development which then took place was  at a separate provincial levy on agricultural incomes became for the first time possible. The segregation of the two types of income and the allocation of agricultural income-tax to the States are features which continue unchanged under the Constitution.

Agricultural income tax in India
For the purpose of analysis, we can divide the history of agricultural income taxation in India into the following three periods

(a) The period of experiment: 1860-86
Over the major part of the East India Company period, the finances of India were in a State of chronic deficit. The Company added only two new levies, viz., the taxes on salt and opium to the traditional revenue sources- land and customs. The Mutiny of 1857 made the position worse. It disorganised the entire revenue system and precipitated a huge deficit for the succeeding years. Besides, the construction of railways, irrigation works and other capital projects led to an enormous. increase in the sterling debt of India.

When the Crown took over the administration of India in 1858, James Wilson was appointed the first Finance Member of the Viceroy' Council. His budget of 1860 marks the beginning of a new chapter in the financial history of India. In order to meet the growing need for revenues, he introduced
(a) a tax on income of all kinds;
(b) a system of licences for art, trades and professions, and
(c) a tobacco tax.

The income-tax was modelled on the pattern of British income-tax. It brought under levy the various categories of income, irrespective of the source from which they derived Income from land was placed on the same footing with all other incomes as regards taxation. It was laid down that profits from land were to be estimated at one-third of the land revenue. As the taxable minimum under the Income-Tax Act of 1860 was fixed at  Rs. 200 a year, persons paying land revenue of Rs. 600 a year or less were exempt from the tax. A claim far complete exemption from the new income-tax was put forward on behalf of landholders, especially those under the Permanent Settlement.

The Act expired on 31st July 1865. Again in 1867 a licence tax was levied. This tax was to be assessed on persons engaged in trade or professions according to the income received by them. Subsequently, the licence tax was converted into an income-tax in the year 1869 in order to bring all other classes into the tax net. This income-tax remained in force until! 1873 when Lord North brook withdrew the income-tax from the fiscal structure. The increased expenditure due to the famine of 1876-77 necessiated the revival of direct taxation. It took the form of a licence tax on non-agricultural income, "' . combined with a cess on land. This system which meant almost equal burden on both types of incomes continued till the year 1886. In that year, the Government of India was faced with a very difficult financial situation owing to heavy military expenditure and the falling rupee-sterling exchange. The then Governor General realized that no form of direct taxation other than a full-fledged income-tax could cope with the growing needs of the treasury. The unsatisfactory licence tax was re placed by a more comprehensive and productive levy under the lncome-tax Act of 1886 which applied to all incomes derived from sources other than agriculture.

(b) The period of complete exemptions 1886-1935
The Income-tax Act of 1886, which was much different from the previous measures, exempted  agricultural income from taxation. The exemption was based upon the continuation of local cesses, which were supposed to represent the agriculturists contribution. In the year 1918, the Government of India introduced a Bill to consolidate and amend the law relating to income-tax. Among others, one
important proposal was intended to bring agricultural income at least indirectly under the income-tax. Section 4 of the Draft Bill proposed that net agricultural income in excess of one thousand rupees was to be taken into account in determining the rate at which the tax would be levied on the non-agricultural income of the assessee. The proposal gave rise to much controversy. The representatives of the landed interests opposed it as being a back-door entry for future taxation of agricultural income. Ultimately the income-tax law was left where it was before.

The question of the taxation of agricultural incomes was again raised before the Indian Taxation Enquiry Committee (1926). The Committee observed “there is no historical or theoretical justification far the continued exemption from the income-tax of incomes derived from agriculture”. The Committee examined the prospects of a additional revenue which might be derived by taxing agricultural incomes, but ultimately arrived at the conclusion that it was not likely to be very substantial. Moreover, the widespread illiteracy among the rural population, the Committee pointed out, would raise a number of administrative difficulties in assessing agricultural incomes. After considering the pros and cons of the problem, the Committee, instead of making any positive recommendation, remarked that

“there would be ample justification for the proposal that income from agriculture should be taken into account for the purpose of determining the rate at which the tax on the other income of the. same persona should be assessed if it proved administratively feasible and practically worth-while.”

Thus though the Committee was convinced about the legality and equity of such a tax, it recommended the adoption of the tax in a rather halting manner in view of practical difficulties.

The Financial Report of the Indian Statutory Commission went one step further in expressing boldly the view that the exemption granted to the agricultural incomes ‘cannot be justified either on historical grounds or by fiscal theory' while recommending the desirability of the removal of exemption 'by stages at specified dates’, the Commission suggested that the tax should be imposed by the Central Government. It recommended further that the whole of the revenue of the agricultural income-tax should be allotted to the Provinces in which it was collected on the ground that

“the tax is the complement of land revenue, that the source of income cannot be transferred and that the yield of the tax is more affected by the policy of the Provincial Government than is the case with non- agricultural incomes.”

The Federal Finance Committee of the Round Table Conference appointed in 1932 considered the more limited question of the possibility of empowering individual Provinces to raise or appropriate if they so desired the proceeds of a tax on agricultural income. The committee recommended that the right to impose such taxation should rest with the Provinces. It also suggested that the definition of agricultural income based on the income-tax Law should be incorporated in the Constitution. The Government of India Act of 1935. which is the milestone in the chequered career of agricultural income taxation >gave the right to levy the agricultural income-tax to the Provinces.


(c)  The period of Provincial (State) levy 1935 onwards
The Government of India Act of 1935 marked a significant change from a unitary to the federal form of Government. The Act provided autonomous administrations in the Provinces and the principle of responsibility at the Centre by means of a dyarchical arrangement was introduced. The Act included taxation of Agricultural incomes in the Provincial list. The States have retained this power under the federal constitution inaugurated on 26th January 1950.

The separation of agricultural and non-agricultural incomes and their placement under separate legislative and administrative jurisdiction since 1935 has been the source of great confusion, inequity and poor revenue performance of the agricultural income-tax. There has developed the most irrational system in which agricultural incomes are taxed in some States and not in others; in the former, there is diversity of assessment procedure, rate schedules, and exemption limits. Significantly, the only common feature is inefficient administration and poor revenue performance.

Present status of State’s Agricultural Income Tax Act
On the basis of the provisions made in the Government of India Act, 1935, Agricultural Income tax was first introduced in Bihar in 1938. This was followed by Assam in 1939, Bengal in 1944, Orissa and Uttar Pradesh in 1948, Hyderabad in 1950, former States of Travancore and Cochin in 1951, Madras and Old Mysore State in 1955.

In India, not all the states took recourse to this levy. Some of the states are still administering the tax; others, after giving it a trial for some years, repealed it. A few States have completely ignored it and allowed the agricultural incomes to enjoy exemption from state taxation.

Before the Income Tax Act of 1961 that governs all direct taxes now, the Income Tax Act of 1860 taxed agricultural income till 1886. We have also had state specific acts to tax agricultural income. The present status of State’s Agricultural Income Tax Act are as under:

(i)        Bihar Agricultural Income Tax (Repealing) Act, 1981
Bihar was the first among the Indians Provinces to add agricultural income-tax to its fiscal structure. The Bihar Agricultural Income Tax Act,1938, provided for a tax on agricultural income's exceeding Rs. 5000. Such tax was payable only in respect of ‘net agricultural income’ which was arrived at after allowing for deduction under several heads. The agriculture income, at the option of the assessee, could also be 'deemed' for the purposes of assessment, to be a multiple of the rent.

The Act of 1938 was subsequently replaced by Agricultural Income Tax Act, 1948. The major change was that the exemption limit was reduced from Rs. 5000 to Rs. 3000, so as to cover a large number of assessees. The rate of tax ranges from 5 percent of income in the lowest slab to 25 percent in the slabs above Rs. 22,000, super-tax is levied on incomes exceeding Rs. 25,000 at rates varying from 6 percent to 33 percent.

Now this Agricultural Income Tax Act, 1948 repealed vide Bihar Agricultural Income Tax (Repealing) Act, 1981 received assented by Governor on 21.01.1982 and published in Bihar Gazette (extra-ordinary) dated 21.01.1982.

(ii)      Assam Agricultural Income-tax Act, 1939
Assam was next after Bihar to adopt agricultural income-tax. The Assam Agricultural Income Tax Act. came into force with effect from 1st April 1939. It was payable by individuals, Hindu undivided families, firms and companies. Tax was payable on the net agricultural income at the rate specified annually. The major portion (99 percent) of the revenue of the state from this tax comes from tea gardens, Assessment of tea garden incomes was made on the basis of the income determined by the Central Income-tax authorities.

(iii)    Bengal Agricultural Income Tax Act, 1944
In September 1941, the Government of Bengal published a Bill to impose the agricultural income-tax but did not proceed further for a couple of years. The Bill was republished in August 1943 and become an Act with effect from 1st April 1944. This measure, with a slightly modified rate structure was continued by the West Bengal Government after Partition.

(iv)    Orissa Agricultural Income Tax Act, 1947
The Congress Ministry of Orissa took up the question of imposing the agricultural income tax as early as 1938 but before any final decision was reached, the Ministry went out of office. Further consideration of the matter was, however, postponed during the war. The question was again taken up at the end of the war. In order to find additional revenue for expenditure on schemes of post-war developnent, the Agricultural Income Tax Act was passed in 1947. The Act came into force from 1st April 1948.

(v)         Uttar Pradesh Agricultural  Income-tax Act, 1948
Uttar Pradesh which introduced Agricultural Income Tax Act in 1948 repealed it within a decade in 1957.

(vi)   Rajasthan Agricultural Income-tax Act, 1953
It was in the year 1951 that the Rajasthan Government decided to introduce this tax. The urgency of finance in the context of development schemes compelled the government to search for new sources of revenue. A special Officer of the Government of India was sent to the Rajasthan state in 1951 to suggest measures for improving the financial position of the State. According to his recommendation the State Government decided to incorporate the tax in its fiscal structure. The Bill was introduced in the State Assembly in their autumn session of 1952. The Select Committee of the legislature suggested certain modifications in the original Draft Bill. The new version of the Bill was passed in the year 1953 and came into operation from 1st April 1954. After only six years of its operation, the tax was abolished in April 1960.

(vii)  Tamil Nadu Agricultural Income-Tax (Repeal) Act, 2004
In accordance with the recommendations of the Committee, the Madras Government introduced the Land Revenue (Surcharge) Bill (Act XIX of 1954) as an experimental measure. Along with it, the Madras Plantations Agricultural Income-tax Bill was intro4uced in the same year. The procedure for the assessment and collection of the tax followed mainly the provisions of the Indian Income-tax Act and the Travancore-Cochin Agricultural Income- tax Act. The scope of the tax was extended to all land holdings by the Madras Plantations Agricultural Income-tax (Amendment) Act, 1958, renamed the Madras Agricultural Income-tax Act. It come into force from 1st April 1958 with the same rates as were applied to the plantation incomes. Subsequently, the surcharge levied on large agricultural holdings was abolished. A substantial amendment to the Tamil Nadu Agricultural Income-tax Act was made in 1971 which sought to bring about a rationalization of the structure of the tax by making the tax levy bear a greater correlation to the income derived from the land.

The Tamil Nadu Agricultural Income-tax Act, 1955 repealed vide Tamil Nadu Agricultural Income-Tax (Repeal) Act, 2004 received the assent of the Governor on the 05.08.2004 and published in Part IV-Section 2 of the Tamil Nadu Government Gazette Extraordinary, dated the 5th August 2004.

(viii)      Karnataka Agricultural Income Tax Act, 1957 (Repealed in 2016)
Karnataka Agricultural Income Tax Act, 1957 which introduced Agricultural Income Tax Act in 1957 repealed its Act in 2016.

(ix)             Hyderabad Agricultural Income-Tax (Bombay Repeal) Act, 1958
Hyderabad Agricultural Income Tax Act, 1950 which introduced Agricultural Income Tax Act in 1950 repealed its Act vide Hyderabad Agricultural Income-Tax (Bombay Repeal) Act, 1958.

(x)            Maharashtra Agricultural Income Tax, 1962
Maharashtra Agricultural Income Tax, 1962 have come into force on the 1st day of April, 1962. It extends to the whole of the State of Maharashtra.

(xi)           Kerala Agricultural Income Tax Act, 1991 [Earlier known as Travancore and Cochin (1951)]
The Princely State of Travancore and Cochin had full autonomy in the yield of taxation. Income tax was introduced in Travancore as early as 1921-22 and agricultural income-tax was levied for the first time in 1943-44. Before the integration of the states of Travancore and Cochin in 1949, the agricultural income-tax was in operation in both the States

In the erstwhile Cochin State, agricultural incomes used to be assessed as per the provisions of the Cochin Income-tax (Amendment) Act of 1946. Before that, the state used to tax only non-agricultural incomes.

After the integration of the two States, the Travancore-Cochin Agricultural Income-tax Act (Act XXII of 1950) come into effect from 1st April 1951. The Indian States Finances Inquiry Committee in its Second Interim Report (1948-49) suggested the extension of the Agricultural Income-tax Law of Cochin to the new integrated state, the rates, however, being those then in force in the Travancore Act.

The Kerala State was formed with effect from 1st November 1956, comprising the• territories of the erstwhile Travancore-Cochin State (less five Talukas) and the Malabar District and Kasargod Taluka which were formerly part of Madras state. In the initial period, the Travancore-Cochin Agricultural Income-tax Act was in force in the former Travancore Cochin area of the newly formed Kerala state and the provisions of the Madras Plantations Agricultural Income-tax Act, 1955, were applicable to the areas transferred from Madras. In order to achieve uniformity in the agricultural income-tax structure, the Travancore Cochin Agricultural Income-tax (Amendment) Act, 1957, was extended to the whole State and the Madras Act which was in operation in Malabar and Kasargod was repealed.

Article 366(1) of the Constitution
Article 366 (1) of the Constitution of India states:
"agricultural income means agricultural income as defined for the purposes of the enactments relating to Indian Income tax”

Legal position of tax on agriculture
    (a)            In the Seventh Schedule, Entry 82 in the Union List mentions taxes other than agricultural income, while Entry 46 in the State List mentions taxes on agricultural income.
   (b)            Therefore, it is in the State List.
    (c)            Section 2 (1A) of the Income Tax Act defines agricultural income as rent/revenue from land, income derived from this land through agriculture and income derived from buildings on that land.
   (d)            Section 10 (1) of the Income Tax Act excludes agricultural income from a computation of total income.

Taxes on agricultural income falls under Entry 46 in “State List” under the Constitution of India
Taxes on agricultural income falls under Entry 46 in “State List” under the Constitution of India. Thus, only the State Governments are competent to enact legislations for taxation of agricultural income. The Central Government cannot levy income tax on agricultural income. From the inception of our republic under constitution, agriculture and taxation of agricultural income is a state subject. Accordingly Section 10(1) of the Income-tax Act, 1961 exempts agricultural income from taxation by the Central Government.
Legislative position of agriculture and agriculture income
As per entry 82 to the Central list in Schedule VII to the Constitution, the Central Government has been empowered to levy taxes on income except agricultural income. As per Article 366, ‘Agricultural income’ shall have the meaning ‘as defined for the purposes of the enactments relating to Indian Income-tax’. The State Government has however the power to levy taxes on agricultural income.

Legal framework
Section 2(1A) of the Income Tax Act, 1961 defines agricultural income. Sections 2(2) and 2(13) and Part IV of the First Schedule to the Finance Act deal with computation of net agricultural income for the purposes of determining the rate of Income Tax applicable to certain non-corporate assessees. Section 10(1) provides for the exemption of agricultural income in the computation of the total income of any person. Rules 7, 7A, 7B and 8 of Income Tax Rules, 1962 deal with Income which is partly agricultural and partly from business.

Legislative History of exemption or taxability of Agricultural Income

In the Indian Income tax
Act, 1860
Agricultural income was taxed for the first time. This tax was withdrawn in 1865.
Under the Indian Income tax Act, 1867
No tax was levied on agricultural income.
But in 1869
An income-tax was levied on all incomes including agricultural income, which, however, was again withdrawn in 1873-74.
The Indian Income Tax Act, (2 of 1886)
exempted agricultural income from the levy of income-tax.
When the Indian Income Tax Act, 1918, was passed
The government intended to tax agricultural income also, but on account of opposition in the Legislative Council this proposal was dropped.
The definition of “agricultural income” as given in the 1918 Act was very similar to the one contained in the 1886 Act.

The definition of “agricultural income” in the Act of 1886 was very similar to that contained in the Indian I.T. Act, 1922. The reason for
exempting agricultural income from tax was that the landlords paid land revenue to the Government and should not, therefore, be asked to contribute to the exchequer more than once, that is, to pay to the Government both land revenue as also income-tax on agricultural income. In addition the landlords also paid a cess on land which corresponded to income-tax and which was not inconsiderable compared to the then low rates of income-tax. The imposition of income-tax would have thus overburdened the land with taxes.
In the Indian Income Tax Act, 1922.
Under the Indian Income-tax Act, 1922, agricultural income was exempt from tax provided it conformed to the definition given in cl. (1) of section 2 of the 1922 Act.
In the Income Tax Act, 1961
Agriculture income is exempt under the Income Tax Act, 1961.

Agricultural income claims as disclosed by Directorate of Income Tax (Systems) in Rs. Crore
Assessment year
Individual
Firm
Company
Others
Total (Rs. in Crore)
2004-05
0.03
-
-
-
0.03
2005-06
0.01
-
-
-
0.01
2006-07
1.65
0.23
585.26
0.17
587.33
2007-08
2361.73
31.49
656.19
101.44
3150.86
2008-09
17116.48
53.50
632.54
825.99
18628.51
2009-10
16482.98
48.04
800.87
543.37
17875.27
2010-11
83875.74
70.39
840.79
2246.96
87033.88
2011-12
199867251.62
86.08
747.92
1275.72
199869361.34
2012-13
67566074.64
102.55
1351.92
1429.26
67568957.96
2013-14
17063.87
141.33
1351.51
65324.28
83914.07

 There is an abnormally high amount of agricultural income shown for Assessment year 2011-12 - Rs 19,98,69,361.34 crore. This is 22 times of the GDP for that year (Rs 87,36,330 crore at current prices).

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