Taxing agricultural income has been an emotive subject in the Indian context. However, taxing agricultural income at minimal rates of about 5% can help rather than hurt our poor farmers.
Given the importance of access to finance, the policy in India has been to compel banks to lend to the underserved.
- However, access to formal finance remains a challenge even after decades of implementation of such policies. This demonstrates that such coercive policies have borne little fruit.
- Also, the burgeoning problem of farmer distress in India despite the existence of the priority sector lending programme for more than three decades is a case in point.
Why tax agriculture income?
A large portion of Indian farmers are illiterate or semi-literate and they do not maintain systematic books of accounts regarding their production and income. Hence, assessing their true income or income-earning potential becomes an onerous task for the bank loan officers.
- So, often bank loan officers in India rely on informal networks created by social affiliations in order to elicit information about the borrowers.
- This provides opportunity to only those borrowers who are connected to the loan officers. Only these people obtain optimal credit.
- Besides, loan officers are rotated every three years. This makes matters worse from a borrower’s point of view. Various studies have shown that a new loan officer entering a branch after job rotation restricts credit to borrowers who borrowed from the previous loan officer.
How tax on agriculture helps?
- Taxing agricultural income can improve access to finance to a large section of farmers because verified income tax returns can provide a credible signal of the earnings potential of a farmer.
- Such verifiable information can help to separate conscientious and productive farmers from the unscrupulous or unproductive farmers. Such separation can be very useful in not only enabling access to finance but also entered using the cost of credit borne by farmers.
- Taxing also helps banks to carefully eliminate strategic defaulter intending to exploit the lax enforcement standards prevalent in the country.
- Well-directed agricultural loans would not only enhance agricultural productivity, but also hasten the movement of unproductive agricultural workers to the manufacturing sector.
How taxing helps both small and big farmers?
Suppose both farmers file income tax returns every year. In this case, the big farmer can present his income tax return to the loan officer in order to demonstrate his earning potential. In the case of small farmers, income tax returns can provide a reasonably credible measure of earnings potential because they would neither have the high income nor the incentives to hide such high levels of income.
- With this, now the loan officer too has a credible basis to distinguish between the borrowers. More importantly, the borrower need not depend on a particular loan officer or a particular bank.
- This also improves the bargaining power of the borrowers by enabling them to tap multiple sources for financing.
There could be a concern that the imposition of tax could lead to credit flowing only to big farmers as they have higher income to show. However, researchers have shown that loan officers can easily infer the true income of large borrowers even when tax records do not present a true picture. Hence, large farmers are less credit constrained.
- But, in case of small farmers, the loan officer cannot assess true income without carefully analysing credible evidence. Income tax return can be one such evidence.
Thus, rather than listening to the powerful lobby of rich farmers, the government should seize the opportunity to benefit the small farmers by taxing agricultural income at minimal rates of about 5%. If this issue is not taken care of immediately, it would lead to low agricultural productivity and high default rates on agricultural loans leading to farmer distress.