Has Niti Aayog Member Bibek Debroy set the cat among the pigeons to propose taxing agricultural income? The idea is not new. Over decade and half ago the Vijay Kelkar Task Force made a suggestion, albeit indirectly, to scrap the tax exempt status enjoyed by agriculture which is a state subject. It batted for a so-called tax rental arrangement, with the Centre collecting taxes on declared farm incomes and passing on the revenues to the states.

This was apparently proposed to end the messy way in which taxes were collected by the states on commercial crops like tea or coffee. The assessment of a company in the tea business was done by income tax officials. Lets say, the company earned Rs 500 crore every year. Of this 60% was imputed as agricultural income, and the balance 40% as non-farm income (read marketing expenses). While the Centre levied and collected the tax on the non-farm income component, states invariably did not collect their share of the levy. That’s because they simply pass consequential orders. It also led to festering disputes. So, the panel came up with the suggestion to let the centre collect levy on the farm income and pass it on states. The idea to enhance revenue and counter tax evasion was sound. But successive governments did not muster the political will to implement the recommendation.

That has not deterred tax officials from probing people who may have tried to evade income tax by using the tax exempt status of agricultural income. But in Parliament, the government has said that there is no provision to tax agricultural income. Policy managers, at best, are trying to test the waters. This year’s Economic Survey, too made the suggestion to tax farm incomes in the chapter on demonetisation. “Black money does not make fine-sectoral distinctions. The income tax net could be widened gradually and consistent with constitutional arrangements, to progressively encompass all high incomes, said the Survey.

Now, the Niti Aayog has broadly echoed what the Survey said, and has backed taxing agricultural income beyond a certain threshold. “I don’t believe in artificial distinction of rural and urban, so whatever is the threshold on personal income should be the exactly the same on the rural side. At best, what I could do is take the average income of three years or five years as agriculture income is subject to annual fluctuations”, Bibek Debroy has been quoted as saying.

Businessmen could put forth a similar argument saying that their profits fluctuate annually. The same threshold is fine, but using averages and so on will only make things complicated, leading to disputes. That’s wholly avoidable.

Will a tax on farm incomes raise the compliance costs? Will a farmer be able to fill, say, a simple Sahaj income tax form? Does India’s tax administration, that many charge is only semi-skilled, have the wherewithal to handle the administrative challenges?

The government should not rush through the proposal that needs legislative sanction. It must be debated extensively with states, the farming community and domain experts. For now, the focus should be to ensure a smooth transition to the goods and services tax regime, and bring food items under the tax net.