Farm income is exempt from taxation under Section 10(1) of Income-Tax Act 1961. This provision was designed to shield small and marginal farmers from financial strain. However, exemption has inadvertently allowed wealthy farmers to avoid paying taxes, even though they benefit disproportionately from public infra, subsidies and services compared to small-scale farmers.
According to People Research on India’s Consumer Economy’s (PRICE) ICE 360° survey, there are about 5 mn ‘wealthy farmers’, each earning over ₹25 lakh annually, with two-thirds of their income coming from agriculture, and the rest from non-farm activities. Though this group represents only 8% of the farming population, they control 28% of the sector’s income.
Interestingly, about 45% of these wealthy farmers also benefit from the PM-Kisan Samman Nidhi. These farmers, primarily residing in top developed rural district clusters across Andhra Pradesh, Punjab, Kerala, Haryana, Tamil Nadu and Karnataka, have larger landholdings and access to modern tech, and are better integrated into commercial agriculture.
The disparity becomes even clearer when one considers that 67% of wealthy farmers own 2-wheelers, 29% own cars, and only 28% own tractors, suggesting their investments extend far beyond essential farming equipment.
Taxing wealthy farmers is an economic necessity and a matter of fairness. In its 2002 report, the Vijay Kelkar Task Force on Direct Taxes argued that exempting agricultural income violates horizontal and vertical equity. Horizontal equity dictates that individuals with similar income levels should be taxed equally, while vertical equity requires those with higher financial capacity to pay more. By continuing to exempt wealthy farmers, the system disproportionately burdens other taxpayers, particularly salaried workers and non-farm business owners.According to ICE 360° survey, taxing just the wealthiest 5% of farmers at a moderate rate of 30% could generate as much as ₹30k cr annually. This revenue could be directed towards developing rural infra, agricultural innovation and targeted subsidies for small and marginal farmers. In addition, accurate tax data on wealthy farmers would help GoI better distinguish between small-scale farmers and affluent landowners, allowing for more effective and equitable subsidy distribution.Wealthy farmers have remained outside the tax net for so long due to their political clout. Many state legislatures are populated by landowners who benefit from the exemption. However, the narrative must shift to emphasise that only the wealthiest farmers will be targeted for taxation, leaving small and marginal farmers unaffected. This requires a redefinition of political priorities.
One significant challenges would be the prevalence of cash transactions in agriculture, which makes it difficult to track incomes and enforce taxation. Many affluent farmers need to maintain formal records of their transactions, often conducted outside the banking system. This lack of transparency complicates efforts to assess income levels accurately and impose fair taxes.
However, India’s push toward financial inclusion and digitisation of rural banking systems offer an opportunity. As more farmers adopt digital payments, tracking agricultural incomes and applying appropriate taxes will become easier.
India can learn valuable lessons from countries that have successfully implemented agricultural taxes without harming small-scale farmers. Wealthy farmers in the US are subject to taxes, including federal and state income-taxes, property taxes, and capital gains taxes. However, US tax laws also provide deductions and credits that support agricultural businesses, ensuring that wealthy farmers contribute their fair share to public revenues without stifling agrarian investment.
Australia and Canada have progressive tax systems where large commercial farming operations are taxed, while smaller farms receive reduced rates or exemptions based on income thresholds.
India could adopt a similar model, ensuring that only farmers with substantial income or landholdings are taxed, leaving small farmers unaffected. Taxing wealthy farmers will require planning, political will and engagement with key stakeholders, including farmer associations, economists and policymakers. It’s a moral imperative and a crucial policy measure for building a more equitable and prosperous future for all.
