The Hindu Business Line : Weeds in the ability zone

TAX economists have laid down valuable guidelines for tax legislation, one of these is that in framing tax laws, ability/capacity to pay by the persons subjected to tax should be considered. And this principle has to be paramount if direct taxes are to be distinguished with indirect taxes such as Central Excise and Customs.

This principle has been candidly accepted by the Finance Minister in his speech in Rajya Sabha on May 3, 2005, while moving Finance Bill 2005 in the Lok Sabha:

"The bulk of the revenues have to come from the people, who have the capacity to pay... Sir, According to me, tax has to be collected from those who can afford to pay... Income-tax is expected to be increased from Rs 48,321 crore in the last year to Rs 66,239 crore in the next year; an increase of 37.08 per cent. Here again the bulk of the tax will be paid by the larger taxpayers... For example, up to Rs 1 lakh, nobody pays tax anymore. The bulk of the income-tax revenue comes from the people in the bracket of Rs 1,50,000 and above. Therefore, we are taxing only those who have capacity to pay. We are hot taxing the poor people. The moment you give a threshold exemption of Rs 1 lakh, I think by definition, the poor people of the country are out. The poor people of the country do not have income of one lakh of rupees of taxable income. I think, it is wrong to say that we are hitting the poor people and we are not taxing the rich enough... "

The foregoing statement of the Finance Minister raises the following issues:

On the basis of the avowed principle of `capacity to pay', why are the rural rich who derive income from agriculture, which includes the cultivation of cash crops on large scale, spared from both income-tax and wealth-tax? There is, prima facie, no explanation for this except perhaps political expediency.

Generally, the reasons given for not taxing agriculturists are that agriculture falls in the disorganised sector and those involved in it are mainly the poor and illiterate. And, that the Central Government has no power to tax agricultural income, as `agriculture' is a State subject in List II of the Constitution. Both these arguments do not stand the test of reason.

Courts after courts (including the Supreme Court) have said that by amending the definition of agricultural income in the Income-tax Act, the Central Government can tax agricultural income to the extent desired. The decisions include Karam Tharuvi Tea Estate Ltd vs State of Kerala (1963 48 ITR 83 SC); K. C. Thomas vs. Agr ITO (1973 91 ITR 438 Kerala); Tata Tea Ltd vs State of West Bengal (1988 173 ITR 18 SC); Ambalal Magan Bhai vs UOI (1975 98 ITR 237 (Gujarat); and Singhai Rakesh Kumar vs UOI & ORS (1996 134 CTR MP 280).

Thus, by amending the definition of agricultural income (for which an amendment can be moved in Parliament with the assent of the President and without amending the Constitution), it can be legislated that those who earn income growing rubber, coconuts, coffee, spices and other such commercial crops on a large scale do not fall under the broad rubric of agriculturalists.

As far as wealth tax levy is concerned, there is absolutely no legal hurdle to subject affluent farmers to wealth tax. The Supreme Court, in UOI vs Harbans Singh Dhillon, held that capital value of agricultural land can be taken into consideration for levying wealth tax despite the exclusionary words in entry 86, List 1.

Expert Committees, too, have strongly recommended the taxation of agricultural income. For instance, the Taxation Enquiry Committee (Wanchoo Committee) in its report published in 1971, devoted much attention to the problem of taxation of agriculture income. The committee felt "there is urgent need for agricultural income being subject to a uniform tax more or less on par with the tax on other incomes so as to eliminate the scope for evasion of direct taxes imposed by the Union Government".

The Tax Reforms Committee (1991) headed by Dr. Raja J. Chelliah has in para 6.7 of his report said that income-tax can become a very iniquitous method of raising revenues if the tax provisions result in unfair and unequal treatment of different individuals in similar economic circumstances or if the law is not applied to all sections of the taxpayers with equal effectiveness. As is well known, the existing income-tax structure is riddled with anomalies and tax shelters, which make the system unfair as between equals.

These observations clearly justify tax on agricultural income. Thus all along, the view had been that the agricultural income and wealth should be taxed. But the dithering in this regard has been mainly from the Government's side not on any economic grounds, but mostly from the point of view of political expediency."

Also, the statement that most of the tax comes from the rich is not convincing, if one goes by the C&AG report No 12 of 2005 relating to the period ending March 31, 2004. There is, however, no statistics on income-wise collection of taxes.

Data needs to be published to prove that assessees in categories B-II and C (see Table) totalling 4.73 lakh, comprising 1.64 per cent of total assessees, contributed to bulk of the income-tax collections in 2003-04. Neutrality and equity are time-honoured concepts in any system of taxation.

Nothing is more disheartening for an honest taxpayer than to find that he is being unequally treated, even as those with similar or even higher capacity to pay are being spared by the tax legislation.

Even for tax administrators, the exemption of a sizable segment of population from the purview of income-tax law creates a host of problems.

Thus, the need of the hour is to tax the affluent agriculturists who have been enjoying various sops, which include subsidies on various inputs used by them in their farm operations. This inequity needs to be eliminated fast. Further, taxing them would greatly help in checking tax evasion and increase revenue.

(The author is a former chairman of CBDT.)

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