Income tax in India, as in all developing countries, is a fraught topic. Ghana, for instance, has revealed in their new budget a determination to widen the tax base. With a low tax-revenue to GDP ratio, many middle and low-income countries are constrained in their efforts to improve public services and the economy. At 16.6%, India’s tax to GDP ratio is quite low.
Data released in 2016 by India’s Income Tax Department said that less than 4 percent of all Indian citizens pay income tax. In essence, the data proved that less than 50 million citizens paid income tax in the year 2014-15 and only 13 lakh showed an income in the highest income tax slab of over 10 lakh per annum.
Income Tax in India
Income tax is paid by individuals and domestic companies. There have been rapid changes in income taxation with the new BJP government, but as things stand, domestic companies pay tax at 30 percent of their total income.
- There is a surcharge of 5 percent surcharge on income above Rs. 10 million and below Rs. 100 million.
- There is a surcharge of 10 percent if income is more than Rs. 100 million per year.
The income tax slabs are different for individuals:
- For those earning less than Rs. 2.5 lakhs per year there is tax exemption.
- Those earning between 2.5 lakhs and five lakhs per annum owed 10 percent of their income to tax.
- Those earning over five lakhs and less than ten lakhs per annum would be taxed 20 percent of their income.
- Those earning over ten lakhs per annum were taxed at a rate of 30 percent.
There is a surcharge of 12 percent, of income over 10 million. Income slabs are slightly different for senior citizens over 60 years of age and for senior citizens over 80 years of age.
Finding the Right Tax Slabs
The right tax slabs have always hotly debated. Many feel that progressive taxation or re distributive tactics are ways to shore up the economic development of the weakest parts of society. However, there are also arguments that talk about the cost to the innovation of very high tax rates.
Chief issues under discussion tend to be how high the floor on non-taxable income should be, how high tax rates should be for the highest earning tax slabs, and what rates of corporate tax encourage innovation as well as assert the duty of corporate to give back to the society they are earning from.
India’s Agriculture and Income Tax
In India, Agricultural income is tax-free. Niti Aayog member Bibek Debroy faced much backlash over a suggestion that agricultural income be treated equally to all other sources of income and brought under the purview of income tax.
Finance minister Arun Jaitley immediately denied the possibility of such a move. The latest census data (of 2011) showed that over half of all workers in India were dependent on agriculture and allied sectors for a livelihood but agriculture itself only contributed 15 percent to India’s total GDP. This complicates matter greatly.
What Is The Data?
According to Income Tax Department data, in the nine-year phase from 2006-07 to 2014-15, over 2700 income tax cases acknowledged agricultural incomes over Rs. 10 million. This is significant revenue that is being missed out, where these people would have been paying 35 percent tax on this income in any other employment category. The case that Debroy wishes to make is clear. However, given the large agriculture dependent population in India, this 2700 approximate number over nine years (about 900 per year on average) is a drop in the ocean.
Research from Thiagu Ranganathan, Assistant Professor, Institute of Economic Growth, Agriculture Economics Research Unit, in his paper named Farmers’ Income in India: Evidence from Secondary Data, in 2014 shows the slabs of farmers’ incomes differently. As we have already seen, anyone with an annual income below 2.5 lakhs per year is exempt from income tax.
Ranganathan’s data showed that farmers with 4 to 10 ha of agriculture land constituted 3.72 percent of the total farming population and earned Rs 1,82,916 lakh on an average in the financial year 2012.
Most farmers (over a third of all farmers) owned between 0.4 ha and 1 ha of land. This class earned Rs 25,726, and about 31 percent of farmers owned even less land than that and consequently earned less than that.
Hence, only 0.39 percent of farmers would be eligible for income tax payment, those who held over 10 ha of land. Significantly, this population would largely come in under the lowest income tax bracket of less than five lakhs per annum income.
What Would It Hurt?
In India, the taxation of agricultural income would come under the states’ purview. In the unlikely case that all states agreed to tax agricultural income, it is easy to imagine what a nightmare the differences in opinion would be.
And it would be quite fair because the clustering of cash crops is also a fact. A few states have well-to-do farmers who grow cash crops or make heavy profits off agriculture whereas in most states agriculture is a hand to mouth, subsistence occupation.