By Douglas Busvine and Manoj Kumar

NEW DELHI (Reuters) - A senior adviser to the Indian government proposed on Tuesday that farmers pay tax, in remarks that challenged government policy in a country of 1.3 billion people where there are only 37 million income tax payers.

Economist Bibek Debroy, a member of the Policy Commission that serves as the government's own think-tank, told a news conference that farmers should pay income tax in line with urban dwellers.

They should be liable to tax on their incomes at the same thresholds, he also said, taking into account typical fluctuations in incomes experienced by farmers over a three-year period.

India's public finances are notoriously precarious, with the International Monetary Fund estimating that tax revenues are equivalent to just 17.7 percent of gross domestic product - low by comparison with other emerging markets.

Still, Finance Minister Arun Jaitley has ruled out taxing farmers, telling parliament last month: "Income from agriculture will not be taxed." Prime Minister Narendra Modi has, meanwhile, promised to double farmers' incomes by 2022.

The finance ministry declined to comment.

Debroy's remarks overshadowed a news conference held by the Policy Commission to mark the end of India's 12th, and last, five-year plan - a legacy of the Soviet-style command economy set up by independence leader Jawaharlal Nehru.

The Policy Commission, set up by Modi to replace Nehru's Planning Commission, is now circulating a draft three-year "Action Agenda", to be followed by a seven-year "Strategy" and a 15-year "Vision" for India's development.

Debroy's boss, Policy Commission Vice Chairman Arvind Panagariya, parried further questions on whether to tax India's 220 million rural households.

Although most farmers are poor, the tax loophole they enjoy has been exploited by rich politicians and even Bollywood movie stars to generate "black" cash from illicit sources.

"We support the proposal ... to tax agricultural income provided the government takes steps to improve the income level of the majority of farmers," said Dharmendra Malik, spokesman of a farmers' union that is allied to Modi's ruling party.

Income tax in India starts at 5 percent when earnings exceed 250,000 rupees ($3,900), climbing to a top rate of 30 percent on incomes upward of 1 million rupees.

The government plans to launch a nationwide goods and services tax (GST) in July that would broaden the tax base.

But, critics say, by focusing on indirect taxation India risks burdening the poor who spend a greater share of their income on daily needs than the better off.

($1 = 64.2600 rupees)





(Writing by Douglas Busvine; Editing by Robert Birsel)