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
|
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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