Raj Committee’s & Additional Taxation and Agriculture

In this article we will discuss about Raj committee’s recommendation regarding additional taxation and agriculture.

1. Agricultural Holding Tax (AHT):

The most significant and Nobel recommendation of the Raj Committee was the one pertaining to the Agricultural Holdings Tax.

The Committee has found 2 basic defects in the present land revenue system;

(i) The incidence of land revenue, relation to the productivity of land is not uniform over different parts of India the reason being that land revenue settlement has been done under different systems and at different times in different parts and

(ii) Land revenue is assigned at a flat rate par hectare find hence is not progressive. It is to overcome these 2 defects and make the agricultural sector contribute its equitable share towards raising resources for further economic development that the Committee has recommended the AHT. This new tax proposal considers the differences in the productivity of land on the basis of certain objective criteria and uniform procedures, and reflect broadly, the degree of progression applicable to other sectors of the economy.

(1) Computation of AHT:

The AHT is a tax on the net rate-able value of an agricultural .land holding; or it is a tax on net farm business income.

The simple formula for computing the actual tax liability under the AHT is:

AHT = X/2% to the net rateable/value of a holding, in which

X = Number of thousand rupees.

Let Rateable value = gross rateable value minus the development allowance (which is 20% of the rateable value, subject to a maximum of Rs. 1,000).

The Committee has given the following example to illustrate the computation of AHT: “Suppose the rateable value of an agricultural holding is Rs, 10,000 and the development allowance is Rs. 1,000, the AHT will be calculated as follows: Gross Rateable value = Rs. 10,000 Development

Allowance = Rs. 1,000 Net Rateable value = Rs. 9,000 X = 9

AHT = X/2 % x Rs. 9,000

= Rs. 405.

If the gross rateable value of agricultural holding is Rs. 20,000 and its net rateaable value is Rs. 19,000, the AHT will be:

= 19/(2 x 100) = Rs 19,000

= Rs. 1,805.

As the incidence of the AHT decreases progressively on small holdings, the formula should be applied to rateable values up to Rs. 600 only. For holdings of rateable value below Rs. 600. AHT may be fixed at a flat rate of Re. 1 per holding.”

(2) Computation of the Rateable Value of Agricultural Holding:

For the purpose of calculating the net rateable value of agricultural holdings, the Committee has suggested:

(a) The division of the whole country into a sufficiently large number of soil-climatically homogeneous district.

(b) Preparation of norms of output of different crops per hectare for each year on the basis of estimates of yield for the previous ten years, and the valuation of the norms of output at the relevant average harvest prices of the preceding three years. This gives the value of the gross output of different crops.

(c) From the above value, paid-out costs of cultivation varying between 40 to 60% of the gross value should be deducted. It will give us the rateable value of a hectare of land growing different crops in different districts,

(d) For each district (tract) there will be a scheduled of rateable value of land per hectare under different crops. The schedule should be prepared for each year.

(e) From this rateable value of land, we should deduct the expenses of irrigation. It will give us the: rateable value of the assess able holding.

To take care of the costs incurred in improvement of land and farming techniques, a development allowance at 20% of the rateable value (subject to a maximum of Rs. 1,000) should be given to all farm holdings.

The Committee has recommended the cancellation of the MIT if the average output of a crop in a district is less than 50% of the earlier years-the rateable value of the land under such a crop should be taken as zero. Relief is also recommended for partial or total crop failures.

(3) Basis of Assessment and Implementation:

The AHT is to be levied on operational holdings, viz., land owned by the farmers minus any part of his land leased out or mortgaged to others plus any land leased or mortgaged by him from others. The basis of assessment will be the family and not the individual.

The Committee recommended the implementation of the AHT in 2 phases:

(i) Replacement of the present land revenue by the AHT on all operational holdings with rateable value of Rs, 5,000 or more; and

(ii) Extension of the AHT to all other operational holdings with rateable value below Rs. 5,000. The Committee estimated that the additional resources likely to be raised from AHT would range between Rs. 150-200 crores p.a.

(4) To Ensure the Success of AHT:

The Committee recommended the evolution of a system of crop inspection and recording of crop acreages. Recording of crop acreage on assessable holdings must be done expeditiously so that the rateable value is ascertained well in time. Reasonable opportunity is to be given to each land holder to represent his case, if in his opinion, the crop acreage shown on his land holdings is incorrect.

Every assessable land holder should be given an Agricultural Holding Book. To ensure uniform and objective application of the AHT all over the country, the Planning Commission should appoint a Standing All-India Committee on AHT. The Committee should review the operation of the AHT every year and, should submit an annual report to the Planning Commission, to be placed before the N.D.C.

Critical Evaluation of the AHT:

(1) “The basic criticism against the AHT relates to the elaborate procedure laid down for the computation of the rateable value of agricultural holdings.

The steps involved are:

(i) A thorough survey of the soil with regard to its nature, quality, suitability to the various crops, irrigation requirements for different crops etc.,

(ii) A thorough survey of the climatic conditions in different districts/tracts

(iii) Division of the country into soil-climatically homogeneous tracts;

(iv) Crop-wise production for the past 10 years for each district/tract and Crop-wise prices for the last three years;

(v) Preparation of Farm Management studies in each soil-climatic district to compute crop- wise paid-put costs of cultivation for each district/tract; and

(vi) Actual assessment of” the operational holdings. All these procedures will involve very heavy cost. Items (i), (ii), (iv) and (v) are particularly expensive, both initially as well as in the future. Moreover, the availability of statistics and relevant data at the right time are likely to pose a formidable problem to the implementation of the AHT.”

(2) Hordes of officials will have to be engaged on a permanent basis for doing all these jobs. The tax-collection machinery will have to be strengthened. Provision has to be made for the setting up of separate courts as large number of disputes in the assessment of AHT will be inevitable. The Raj Committee has not given proper thought to the administrative difficulties and the additional costs involved.

(3) According to Hanumantha Rao “the calculation of norms of productivity on the basis of the estimates of yield for the previous 10 years is wrong as this would definitely under-state the incomes of large farmers under conditions of rapid technological progress”. For example the yield of wheat per hectare in Punjab was 35% more in 1971-72 when compared to 10- year average, between 1962-63 and 1971-72.

(4) Raj Committee is wrong in estimating paid-out cost at 40 to 60 per cent of the value of their gross output for all un-irrigated lands, with extra deduction for expenses of irrigation. The result is that the percentage of gross output deductible as costs would be higher for irrigated crops than for un-irrigated ones. But the little available evidence from farm management studies shows clearly that the unit costs are significantly lower for irrigated crops as compared to un irrigated lands.

Besides, the technological revolution can be expected to reduce unit costs still further in irrigated areas. “All these criticisms do not. however, invalidate the imposition of the AHT. If for administrative or non-administrative reasons, a 20-year period for calculating norms of productivity is found to be too long, a shorter period can be adopted. If annual assessments are difficult, triennial or quin-quennial assessments can be tried. These are matters of administrative detail, and considerable adaptation and improvements are possible, once the AHT is introduced.”

(5) Some writers have predicted the failure of AHT on the ground of lack of records relating to occupational holdings, incorrect reporting of aggregate holdings of families, deliberate misreporting of crop patterns, problems of benami holdings and benami transfer of holding, etc.

(6) According to some, the AHT contradicts the Raj Committee’s own guiding principle governing agricultural tax policy. The incidence of direct taxation should be broadly the same on comparable income and wealth groups irrespective of the sources of such income and the forms in which wealth is held.

On the basis of this principle the Committee should have straight away recommended that (a) all land holder getting Rs. 5,000 or more from agriculture should pay AHT roughly at the same rate as those in the non- agricultural sector pay income tax ; and (b) land holders getting less than Rs. 5,000 should have been exempted as their counterparts in the non-agricultural, sector.. Instead, the Raj Committee has recommended the AHT for all land holders with net rateable value of Rs. 600 and above; and for all farm business incomes below Rs. 600, the Committee has recommended uniform AHT of Re. 1 per holding. The Committee’s recommendation is clearly regressive.

(7) A sound criticism against AHT is that it is based on operational holdings and, therefore, leaves put the rental income from agricultural taxation. In the words of Hanumantha Rao: “Since the case for taxing rental incomes is even stronger than the taxation of farm business income, the Committee’s recommendation in this respect, if accepted, would introduce a fresh element of inequity in fact perversity in the system of agricultural taxation in India.”

(8) Many critics have characterised the Raj Committee’s estimates of additional revenue from the AHT-between Rs. 150 crores to. Rs. 200 crores- as purely imaginary. The critics naturally pose the question whether it is at all worthwhile for the States to incur huge expenditure on the AHT and cancel the land revenue yield of AHT is highly uncertain and conjectural.

(9) “What is really necessary is not to throw out the AHT as useless and impractical but to accept the AHT in principle and make a start by covering only the top decile of family holdings in each area arranged according to the size of these holdings. The revenue authorities of the village and the taluk may provide information about the potential candidates in each village. Once a start is made, extension in coverage and depth can be made in course of time. The income tax and the wealth tax, it may be mentioned here, had humble beginnings.”

As Prof M.L. Dantwala states: “No system of, taxation, however, ingeniously devised, can be perfect. On the whole, the Committee appears to have made valiant effort to adhere to the guiding principles enunciated by that the outset. At worst, one can be sceptical about its claim to simplicity.”

2. Partial Integration of Agricultural and Non-Agricultural Incomes:

Another main recommendation of the Raj Committee is the integration of both agricultural and non-agricultural income for the purpose of income- tax. It is based on the principle that the tax burden on assessees with similar incomes; doss not differ sharply merely because of the fact that part of it is derived from farm.

Integration will also help to check evasion through the device of camouflaging taxable incomes as gains from agriculture. As the proposal is not a tax on agricultural induced as the Centre, it would not require any constitutional amendment.

The Committee has recommended integration of agricultural and non-agricultural incomes only assessee has taxable income exceeding the minimum exemption limit for income tax.

In determining the rate of tax on non-agricultural income should be combined in the following manner and order:

(i) The initial exemption allowed out of non-agricultural income,

(ii) Agricultural income; and

(iii) Balance of non-agricultural income.

3. Integrated Taxation of Agricultural Property through Wealth Tax:

The Committee recommended that the AHT should be supplemented with a tax on agricultural property and a tax on capital gains arising out of transactions as such property. Valuation of farm lands for wealth-tax purposes should be made through the method of income-capitalisation. A simple method would be to take 4 to 6 times the rateable value of a holding averaged over a period of years.

Two radical suggestions have been made by the Committee which go against the recommendations of the Wanchoo Committee on the same subject.

(1) The Raj Committee proposed to do away with all exemptions, except that the basic exemption should be raised to Rs. 1.5 lakhs.

(2) Wealth-tax should be imposed on family basis.

4. Integrated Taxation of Capital Gains on Agricultural Assets Through laconic Tax:

The Committee has recommended that the definition of capital asset be so broadened as to allow taxation of capital gains from transfer of all agricultural land irrespective of their location. Gains from transaction in assets held, for not more than a year should be treated as ordinary income and tried accordingly.

Agricultural Income Tax:

Indian Planning Commission have strongly recommended the imposition of a highly progressive agricultural income tax as a necessity.

It is being pressed on the following grounds:

(1) Government have invested large amounts of money in agriculture but very little of resources have flocked back into the Govt. treasury from the rural sector.

(2) Agricultural performance has improved considerably in recent years and thus has added substantially to disposable incomes in the hands of agriculturists.

(3) The number of rich farmer has increased very rapidly as a result of the Government’s emphasis on intensive development in selected area. These farmers are bearing no burden at all.

The recommendation of the Planning Commission for the imposition of a progressive income tax has been turned down by the Chief Ministers. Since agricultural income tax is a state subject, its imposition by the Centre is not possible without a constitutional amendment.

It can be shown how an agricultural income tax is inferior to a land tax. While the land tax is fixed and while the marginal of land tax is zero, the agricultural income tax is tax on actual production and varies with production; and marginal rate of agricultural income tax is positive.

As I.S. Gulati and V.N. Kothari point out: “At its extreme, a tax on current agricultural produce is tantamount to taxing land use and exempting nonuse of land. Thus, if the land tax is replaced by agricultural income tax, there is likely to be a transfer of land from productive to unproductive or less efficient uses and the pace of unproductive to unproductive or less efficient uses and the pace of improvement is likely to slacken. The perverse effect of the proposed change in our system of agricultural taxation cannot, therefore, be brushed aside.”

The progressive agricultural income tax is justified on the ground that while there is progression in the taxation of non-agricultural income there is no such progression in the taxation of agricultural income. The higher income farmers are left free or pay a considerably small percentage of their income as tax.

But it is forgotten that agricultural income tax is levied in all states are that it is highly progressive. Leaving a minimum income the rate of agricultural income tax rise to as much as 45% in Tamil Nadu, 50% in Maharashtra and 78% Assam.

From a little over Rs. 4 crores in 1951-52, agricultural income tax yielded Rs. 15 crores in 1977-78.There is one important reason why the states have kept agricultural income tax rates low and have not attached sufficient importance to them—this is due to the imposition of various levies and cesses along with land taxes , such as betterment levy, road and education cesses, water tax, etc.

In any analysis of progressive agricultural income tax in India, we should give sufficient weight to the economic and administrative difficulties in imposing such a tax.

(1) There is difficulty in determining farm income. Income is taken to be the difference between the revenue received and the expenses incurred. In agriculture revenue will be equal to sale proceeds of different crops; and expenses will include the expenses of the farmer on land, hired and family labour including supervisory labour, appliance, implements, fodders, fertilisers, etc. It is difficult for an ordinary farmer to estimate these expenses. Nor do farmers keep any records. This is the main difficulty in the imposition of agricultural income tax.

(2) There are wide fluctuations in outputs and price of various crops. Wide fluctuations in output and prices of various crops will result in wide fluctuations in farm income as well. Hence, the basis of taxation becomes indefinite.

(3) There are different systems of land holdings and different kinds tenancies. The problem would be to locate the assessee. In many a case, the total farm income produced in a holding may come under tax but when shared between the landlord and the tenants it may not.

(4) The cost of collection of farm income tax may be very heavy since the farmer assesses are widely scattered. The number of small assessees will be large. It is feared that the collection charges may be high proportion of the total revenue.

We can argue that all these difficulties can be overcome over a period of time when the tax administration acquires more experience. This is true. There is one point which should not be forgotten in all our preoccupations with concepts of equity and progression.

“The high income groups particularly among the industrial and trading classes have various devices of tax evasion and avoidance and hence the effective rate of income tax is considerably lower in the non-agricultural sector. These devices may not always be available to the farmers. The high rate of progression which exists only on papers as far as the non-agricultural sector is concerned, will prove, when introduced in the agricultural sector, a weapon of oppression of the agriculturists. The prosperous but unscrupulous farmer will join with the corrupt tax collector and cheat the Government. The body satisfaction would be that there is progressive agricultural income tax similar to the progressive personal income tax at least on paper! The Raj Committee rejected the Agriculture income tax and preferred the AHT which is based on productivity and is also progressive.”