American novelist Scott Fitzgerald thought the rich were different ‘from you and me’. But Ernest Hemingway, his contemporary in American literature, didn’t think so, as evident in his riposte, ‘Yes, they have more money’.
But whether the rich have anything more to distinguish themselves from the general public other than a minor matter of a fatter bank balance, we may never quite know. But there was some evidence last week that at least in India, they are more adept at farming than the vast majority of farmers who are struggling to eke out a living from agriculture! They seem to have mastered the art of making agriculture an extremely lucrative vocation, judging by the number of income tax assessees who have declared an agricultural income in excess of ₹1 crore.
As newspaper reports have it, metro cities like Delhi, Mumbai, Kolkata and Bengaluru have the most ‘crorepatis’ who have declared agricultural income of over ₹1 crore in the past nine assessment years. The income tax department, evidently, is conducting a probe.
This was also confirmed by the Finance Minister Arun Jaitley, who said in Parliament on Tuesday last, that many prominent people are being probed to see if they were not concealing their otherwise taxable income by the simple expedient of painting it in the colour of agricultural earnings.
The number tales
The official data on the subject is revealing. Between assessment years 2008-09 and 2015-16, 321 assessees in Bengaluru declared agricultural income of over ₹1 crore, followed by Delhi (275), Kolkata (239), Mumbai (212), Pune (192), Chennai (181), Hyderabad (162), Thiruvananthapuram (157) and Kochi (109).
It is not clear if the same set of assessees are declaring such high sums of agricultural incomes year after year or it is that those claiming to be engaged in farming got lucky from time to time during the period under analysis. But whatever it is, it taxes our credulity that so much income can be made out of a vocation that is largely seen as a losing proposition.
One wishes the Finance Minister and his team at the income tax department all the luck and Godspeed in their endeavours, but they have an uphill task. They are being called upon to establish something that philosophers and great thinkers have generally regarded as impractical — to prove the non-existence of something — in this case, agricultural income.
Mind you, the IT department might still be able to unearth some evidence to the effect that these taxpayers had undertaken some non-agricultural activity on which they earned some taxable incomes. But does it automatically negate what has already been disclosed by the taxpayer as agricultural income?
Certainly not! Even if the person making such a claim (agricultural income of over one crore of rupees) has nothing more by way of supporting evidence than the fact that he owns a mere acre of land on which paddy was grown. That may be greeted with disbelief and much derision by those in the income tax department.
But does that entitle them to disregard the claim of it being agricultural? Even if this person was a civil servant or a politician holding some position of power in the Government at worst, it may expose him to the charge of having indulged in some corrupt act which is punishable under the Prevention of Corruption Act.
But that will require the State to establish the fact that the underlying asset (agricultural land) was acquired during that person’s stint as a ‘public servant’ and whose acquisition came from resources that were beyond his known sources of income.
To establish all this under the existing due process of law is very complex and tedious beyond description. We are back to dealing with the question of what to do with the initial problem of the taxpayer declaring an agricultural income of proportions.
Why the interest?
So what is it about agricultural activities that seem to have attracted a particular class of taxpayers earning incomes from legal or illegal means into declaring it as ‘agricultural incomes’?
The income tax law specifically exempts agricultural incomes from taxation. That is because in the constitutional arrangement of powers of taxation between the Centre and the States, taxation of agricultural incomes is a State subject.
In the spirit of such an arrangement, the income tax law enacted by the Centre for dealing with taxation of non-agricultural incomes had an explicit stipulation that agricultural incomes would be exempt from its purview. The expectation was that the States would soon come up with their own tax codes for agricultural incomes and every citizen would be brought under the tax net one way or the other.
But over the years, States showed no inclination to tax agricultural incomes (Kerala and West Bengal were the notable exceptions). This was proving to be a handicap for proper enforcement of tax on non-agricultural incomes, as even incomes legitimately unearthed from a raid or a routine search operation by income tax officials could be explained away as agricultural income.
The clubbing provision
To plug this loophole and subject non-agricultural income to higher rate of tax where there was an element of agricultural income, the ‘clubbing provision’ was introduced many years later.
The effect of this ‘clubbing provision’ was that non-agricultural income would be subject to at least a higher rate of tax merely by virtue of the fact that there is some agricultural income compared with someone with similar quantum of non-agricultural income but otherwise zero agricultural income.
To illustrate, think of two individuals, A and B. A has a non-agricultural income ₹1 lakh and agricultural income of ₹5 lakh. B has no agricultural income, but earns the same amount as A does from non-agricultural sources.
Under the tax law as it exists now, A’s non-agricultural income of ₹1 lakh would be taxed at a rate applicable for the last ₹1 lakh to a person earning ₹6 lakh of total income. In other words, if the basic exemption limit from tax for incomes is ₹1 lakh, then B would be completely exempt from paying any tax, while A would pay tax at a rate applicable on a slab of income between ₹5 lakh to ₹6 lakh.
The way out
Given the legal difficulties inherent in successfully prosecuting manifestly false declarations of agricultural incomes, the best the Government can do is get Parliament to enact a law that treats agricultural incomes derived from transactions that leave an electronic trail for sale of agricultural produce, differently from those that do not, with the latter being subjected to even more punitive rates of taxation.
The existing ‘clubbing’ provisions’ (under the IT Act) for agricultural incomes can be modified to apply only to cases where the gross receipts (sales) are registered through transactions at approved market yards where farmers traditionally bring their produce for sale. Additionally, the law may stipulate that sale of produce through the National Spot Exchange (an electronic trading platform for sale of agricultural commodities) also be covered in its scope.
All other disclosures of agricultural income which must inherently be of a dubious nature but otherwise difficult to establish in a Court of Law, would be subjected to a maximum of marginal rate of 50 per cent. This would roughly correspond to the tax rate applicable on voluntary disclosure of tax evaded incomes of the past, a new provision introduced in the latest Budget 2016.