How should we tax agricultural income? The Constitution allocates this function to state governments, which generally levy nothing on farmers, though many levy hefty rates of tax on plantations. There is a tax on land, called land revenue.
But competition between state political parties has pushed land revenue rates to very low levels, and not even these are collected in practice.
There has been some talk recently of amending the Constitution to make agricultural income a central subject. The Centre can then levy this tax, bypassing the political constraints that hamper state governments. The revenue raised can be passed on to the states, so that they gain income even while ostensibly losing tax powers.
I personally think that agricultural income tax is a logistical nightmare that is unworkable. The income tax authorities are unable to collect taxes from small businessmen and self-employed people even in cities with tax offices.
How on earth will this over-extended, unmotivated and corrupt group of officers deal with millions of tax returns from rural areas? Tax liability per head will generally be small, since even large operational holdings are typically distributed in the names of several family members, each being a separate tax entity.
Collecting small amounts of agricultural income tax from millions of farmers is administratively impossible. Besides, millions of farmers are nowhere near the nearest income tax office.
Can anybody expect them to make strenuous efforts to contact an income tax office that may be a 100 miles away?
On the other hand the country has a ready-made administration in place to collect land revenue. The Mughal Empire and British Raj both understood that taxing agricultural income was impossible, since nobody could really check a farmer’s costs and income.
Instead they levied a tax on land, which could easily be measured. They laid down draconian procedures for quick collection of land revenue, maximising the incentive to pay this tax on time. These two great empires were financed overwhelmingly by land revenue.
So, when any state government today complains that it lacks tax capacity, just laugh and point to the history books.
Given the fiscal crisis in the states, the need of the hour is to revive the tax on land which financed the great empires of the past. A huge section of the state administration from the collector to patwari and girdhavar has been created to collect land revenue. Why then is it not collected?
For political reasons. The values we hold today are very different from those of past empires. Today we hold that empires that taxed peasants heavily were exploiting them.
During our independence movement, our leaders accused the British Raj of impoverishing the peasantry through high land taxes, and swore to reduce these after independence.
Ironically, those leaders never imagined that land revenue would disappear while the machinery to collect it would remain intact.
The biggest landowners paid the most land revenue. Now, after Independence, larger farmers came to dominate or play a crucial role in state politics.
This powerful farm lobby was able to ensure state subsidies for water, power and credit. Naturally the lobby was able to ensure cuts in land revenue rates, and not pay it at all in practice.
Besides, after Independence it became politically difficult to seize the land of defaulters, who would offer physical resistance and create a law and order situation.
Any bank officer will tell you it is impossible to seize land pledged by farmers as collateral for loans. Local people will beat up any bank officer who attempts to do so. Politics triumphs over the rule of law. I am certain that the same fate will befall any attempt to collect income tax
So is there any way out? Yes indeed. First, I think agriculture should be taxed through a tax on land, not income, because of administrative feasibility.
Second, we need to recognise that no farmer will want to pay land revenue if the money disappears to a distant state capital, or even to a somewhat distant zila headquarters. But the farmer may be more willing if the money remains with the gram panchayat, and can be used only for local purposes.
This is probably a necessary condition for success, but not a sufficient one. The largest farmers will have the largest land revenue liability, and will try to sabotage collection.
Smaller farmers will have a lower liability but will also seek to avoid payment. They may feel that the cost of taxes outweighs any benefits they get from panchayat schemes.
The only way to overcome this, I think, is to create a new incentive that increases willingness to pay land revenue. Ideally, the new incentive should be a matching grant from the state government for land revenue collected.
If a panchayat collects, say, Rs 2 lakh in land revenue, it should get another Rs 2 lakh from the state government as a matching grant, to be used only for local purposes.
The beauty of a matching grant is that it provides an incentive for timely and efficient collection. A case can be made to every farmer, big or small, that the benefit he gets from the system outweighs his own tax payment.
Some drones will want to avoid payment of dues and yet enjoy benefits flowing from the tax efforts of neighbours. Disincentives are needed to prevent this.
For instance, the matching grants should come only after land revenue is collected on a high proportion of village land, say 90% or more, and deposited in a designated bank account.
That will enable the paying villagers to put social pressure on those who have not paid. This social pressure will not work everywhere, but will surely be more effective in collecting dues than our formal tax collection machinery. It is an idea worth trying.