Farmhouses, or tax havens?

S Murlidharan | Updated on January 21, 2011


Sadly, the Direct Taxes Code has chosen to let agriculture be used as an alibi for tax evasion and farmhouses for everything else but farming.

That farmhouses are more about luxurious living and tax evasion by city slickers and those fighting city-frazzled nerves rather than about farming is trite. They dot our urban fringes and have become the status symbol of the rich and the famous of both actual and wannabe varieties. Anybody who is somebody must flaunt it.

A farm house was innocently thought of by the income-tax law as a necessary adjunct to farming where, say, 90 per cent of the land would be under cultivation and the remaining used for accommodation purposes. But wily tax planners have turned the idea on its head.

Farming has become peripheral to luxurious living, away from the maddening crowd, but cocooned amongst the glitterati. Most of the farmhouses resemble American ranches though nowhere near their size. A farmhouse, the income-tax law says, is a building used by the tiller either as a store house or as a residential house and must exist cheek by jowl with the agricultural land where cultivation is being carried out.

DTC provision

The Direct Taxes Code (DTC) allows an additional use for a farmhouse — being used for processing to make the agricultural crops fit for the market — without in any way detracting from the agrarian sense in which the term farmhouse is basically defined and understood.

It is amazing that while for everyone else, including a low income house owner, only one self-occupied residential house is tax-free with the additional ones, if any, being deemed to be let out, for one owning farmhouses in each major city, there is absolutely no limit and all of them are tax-free on the facile plea that they are adjunct to and necessary for carrying farming.

And what is more, when these houses are sold there is no capital gains tax either, once again on a facile plea this time round that they are located in rural areas.

It redounds to the dubious credit of successive governments that they have chosen to look the other side without let or hindrance when the charade has been going on presumably because politicians too are a part of it and partake in its spoils and it is advisedly better not to rock the boat.

The NDA government, however, did try a bit to stop the gung-ho farmhouse owners from explaining away the fabulous rentals earned from hiring out their farmhouses for lavish marriages and from other extraneous uses not germane to farming as income from a farm house immune from tax.

But that has not done anything to stop farmhouse marriages because marriages in India are bankrolled by cash and a bride's father in a mood of supreme elation does not mind paying the rental in cash without receipt.

Given the muted outrage and outcry against the farmhouse culture, which in addition to enabling its adherents the comfort of tax-free luxurious living, affords a convenient alibi for explaining away their unaccounted income as emanating from tax-free agricultural activities, it is amazing that Greater Noida Industrial Development Authority has had the gumption to come out with an advertisement in newspapers in the North on January 12, 2011, for developers to participate in a Scheme for Development of Farm Houses on Agricultural Land.

Passport to evasion

That a governmental authority of all people is playing ball with people coveting farmhouses is disgusting, nay revolting, given the pejorative connotations associated with the term ‘farmhouse' and the passport it affords for tax evasion. It can be assumed without the fear of contradiction that while farmhouses would be constructed on agricultural lands — on which once upon a time agricultural activities were carried out, there won't be a binding requirement on the owners of such houses to carry on farming on a meaningful scale.

One wishes such condition were indeed imposed. There is nothing wrong with gentlemen farming, especially in a milieu when traditional agriculturists are abandoning agriculture and swarming the cities and towns. Indeed, agriculture needs to be glamourised if only to address the supply side constraint responsible for the spiralling and unabated food inflation.

The governments, instead of giving a leg-up to farmhouses, should give a leg-up to farming. Decks must be cleared for corporate farming on Indian soils. Quite a few Indian entrepreneurs have taken wings and started cultivating pulses in African soils.

The danger with such adventures is food riot so common in swathes of poverty-stricken Africa — when in extremis, local population can be counted upon to physically stop the produce from being shipped to India.

The DTC, one hoped, would cry a halt to agriculture being used as an alibi for tax evasion but sadly it has not. The bastions of dairy and poultry farms fronted by agricultural farms have never been stormed nor has any farmhouse on the outskirts of cities been visited to ascertain whether any farming goes on or not. Of course it does not.

But no income-tax authority has ever called the bluff of the city slickers.

(The author is a Delhi-based chartered accountant.)

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Published on January 21, 2011
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