Tax reform dilemmas

For a fairer, more inclusive tax system, taxing agriculture and adjusting exemptions are essential

Discussions on enhancing economic growth in the country, as well as those on fiscal sustainability, zero-in on the need to raise the taxto-gross domestic product (GDP) ratio for India. This is based on the premise that governments need to and can- play a larger role for the country to achieve its aspirational goals. Reduction in subsidies and the rationalisation of expenditures, too, find mention, but the political economy challenges in undertaking these changes are well recognised.

Two important tax bases to examine are: Personal income and land and property. Two contentious issues to consider in taxation of personal income are taxation of agricultural income and effective exemptions under personal income tax. There is a need to re-examine the taxation paradigm in both these cases to effectively expand the tax base.

Consider the taxation of agricultural income. The constitutional assignment of taxation places the responsibility for taxing agricultural income in the hands of state governments. Over the years, states have not been able or willing to tax this component of their base. Arguments for not taxing agriculture can be classified into two broad categories: First, the average size of holding and, therefore, average incomes generated in the sector are small, and hence should not be subject to the fiscal and compliance cost of taxation. Second, agriculture is considered a difficult sector to tax, with limited returns for the administrative effort required.