Agriculture income forms 21% of the Gross National Product.

It forms the main

income head of the rural india. However Agriculture income is exempt from the
income tax act. This means that income earned from the agricultural operations is
not taxed. The reason for exemption of agriculture income from central taxation is
that the constitution gives exclusive power to make laws with respect to taxes on
agricultural income to the state legislature. However while ccomputing tax on non
agricultural income agricultural income is also taken into consideration.

As per income tax act income earned from any of the under given three sources
meant agricultural income.

1. Any rent received from land which is used for agricultural purpose.
2. Any income derived from such land by agricultural operation including
processing of agricultural produce, raised or received as rent in kind so as to
render it fit for the market or sale of such produce.
3. Income attributable to a farm house subject to the condition that building is
situated on or in the immediate vicinity of the land and is used as a dwelling
house, store house etc.

Certain income which is treated as Agriculture Income:

a. Income from sale of replanted trees

b. Rent received for agricultural land
c. Income from growing flowers and creepers
d. Share of profit of a partner from a firm engaged in agricultural operation
e. Interest on capital received by a partner from a firm engaged in agricultural
operations.
f. Income derived from the sale of seed

Certain income which is not treated as agricultural income

a. Income from poultery farming

b. Income from bee hiving
c. Income from sale of spontaneously grown trees
d. Income from dairy farming
e. Purchase of standing crops
f. Dividend paid by a company out of its agriculture income
g. Income from salt produced by flooding the land with sea water
h. Royalty income from mines
i. Income from butter and cheese making
j. Receipt from TV serial shooting in farm house is not agriculture income.

In order to consider as income as agricultural income certain points have to

be kept in mind
1. There must be a land
2. The land is being used for agricultural operations: Agricultural operation
means that effors have been induced for the crop to sprout out of the
land. The ambit of agricultural income also covers income from
 agricultural operations which includes processing of agricultural produce
to maje t fit for sale. Kike the people who receive passive agricultural
income in the form of rent oe revenue the people who actuallu catty out
agricultutal oprerstionsare also eligible for tax free agricultural income.
3. Land cultivation is must: some measure of cultivationis necessary forland
to have been used for agricultural purposes. The ambit of agriculture
covers all land produce like grain, fruits, tea, coffee, spices,
commercialcrops, plantations,, groves and grasslands. However, the
breeding of livestock, aqua culture, dairy farming and poultry farming on
agricultural land cannot be construed as agricultural operations.
4. If any rent is being received from the land then in order to assess that
rental income as agricultural income there muct be agricultural activities
on the land.
5. In order to assess income of farm house as agricultural income the farm
house building must be situated on the land itself only and is used as a
store house/dwelling house.
6. Ownership is not essential: in the case of rent o revenue, it is essential
that the assesse have an interest in the land (as an owner or mortgagee)
to be eligible for tax-free income. However in the case of agricultural
operations it isnt necessary that the person conducting the operations be
the owner of the land. He could be just a tenant or a sub tenant. In other
words all tillers of the land are agriculturists and enjoy exemption from
tax. In some cases, further process may be necessary to make a
marketable commodity out of agricultural produce. The sales proceeds in
such cases are considered agricultural income even though the producers
final objective is to sell his products.
7. Income from plantation companies: many plantation companies have
launched schemes that offer tax-free agricultural income. These schemes
are of various types; while some give investors leasehold rights to the
land, some give rights to trees a certain level above the ground, even as
others offer rent. If the scheme gives rise to ownership or leasehold
interest in the land then the income is considered to be rent or revenue in
the hands of the investor. In the absence of ownership or leasehold rights,
income from plantation companies is either considered interest or non
agricultural income chargeable to tax.

Tax on sale of agricultural land: before 1970 profit on the sale or transfer of
all agricultural land was considered rent or revenue derived from the land.
Such profit was therefore tax-exempt as agricultural income. There were
several favorable judgements of various high courts on the issue. However
via a retrospective amendment that took effect from april 1, 1970 Land
qualifies to be agricultural land if it is not situated in any area which is
comprised within the jurisdiction of a municipality (whether known as a
municipality, municipal corporation, notified area committee town area
committee, town committee or by any other name) or a contonement board.
And which has been published before the 1 st day of the previous year in which
the sale of land takes place, and it is not situated less than eight kilometers
from the local limits of any municipality or a cantonment board.

If by the test above, the land is agricultural land, it will not form part of the
definition of a capital asset and so there will be no capital gains on the sale of
such land. Agricultural land not forming part of the above will be a capital
asset and sale of which will attract capital gains tax subject to section 54B,
which is explained below.

Section 54B- Capital gain on transfer of land used for agricultural purposes
not to be charged in certain cases.

The agricultural land should have been used for agricultural purposes. It must
have been used either by the assesse or his parents in the two years
immediately preceding the date on which the transfer of land took place. The
assesse should have purchased another land, which is being used for
agricultural purposes, within a period of two years from the date of sale.

The whole amount of capital gain must be utilsed in the purchase of the new
agricultural land. If not, the difference between the amount of capital gain
and the new asset will be chargeable as capital gains and the tax will be
computed accordingly. The new asset purchased should not be sold with in a
period of three years. If sold, the cost of the new asset will be reduced by the
amount of capital gain for the purpose of computing capital gains tax. Where
the amount of capital gain is not utilized by the assesse for the purchase of
the new asset before the due date of furnishing his return of income, he may
deposit it in the capital gains account scheme (cgas) of any specified bank.
The return of income of the assesse should be accompanied by the proof of
such deposit. In such a case, the cost of the new asset shall be deemed to be
the amount already utilized by the assesse for the purchase of the new asset
together with the amount deposited in the cgas.

If the deposited amount is not utlised for the purchase of the new asset
within the specified period, then the utilized for the purchase of the new
asset within the specified period, then the utilized amount shall be charged in
the year in which the period of two years from the date of sale of the original
asset expires.

4.1.1 Suggestions for taxing agricultural income.

1. Sometimes, a tenant could slip up on rent or revenue payments (either in

cash or kind) and have to pay arrears. If the landloard charges interest on
such arrears, the income would not be considered agricultural income, but
would be deemed income by way of interest and would, hence be chargeable
to tax. While rent presupposes periodical and pre-determined payment
(either in cash or kind), revenue implies a sharing arrangement that
depends on the actual agricultural produce. In either case, ownership of
agricultural land or inter in such land is essential. Which means, the owners
of agricultural land, tenants who are given a sub-lease, and people who are
mortgages of agricultural land, all enjoy tax-free agricultural income. This
should be taxed.

2. Any processing done on agricultural produce to make it marketable is a

part of agricultural operations and such amount recovered will be treated as
agricultural income only. Say for example trashing of wheat, mustard, etc is
part of agricuktural operation only and the amount recovered will be treated
as agricultural operation only abd the amount recovered will be treated as
agricultural income only no matter processing takes place on the land itself or
some other place. This can be brought into tax net.

3. No matter whether the land is urban or rural agricultural land. If

agricultural operations are carried out on land the income derived from sale
of such agricultural produce shall be treated as agricultural income and will
be exempt from tax. This differentiation should not be left. It has to be taxed.

4. Agricultural income is exempt from income tax. No matter agricultural

operations are done by an industrial organization or an individual. If any
industrial organization grow crops and sale half of the goods as raw material
in market and remaining further processed and sold as finish goods the
income earned on first half of produce which is sold in market as raw material
is totally exempt from tax. This is an unacceptable practice and all such
enterprises have to be taxed.

5. Dairy farming is not an agricultural income. Similarly other profiteering

activities have to be defined as non-agricultural and taxed at optimal rates.

6. Rent received from agricultural land used from agricultural purpose is

treated as agricultural income. This is the law. This has to be changed.

7. Agricultural income is exempt under section 10(1) of the Act so long as the
income is derived from agricultural land situated in India. This income is
however, included merely for rate purposes and rebate is allowed on the
same in accordance with the finance act no. tax is payable if total income of
an individual do not exceed 150000/- the inclusion of agricultural income for
rate purpose is only required where the total income exceeds Rs.150000. The
practice to arrive at the rate on using agricultural income is an outdated one
and has to be done away with.

This gives us a basic idea about the agricultural income taxation and we have
to keep in mind that the incidence of tax has to be directed and well-crafted
out so that the poor farmers are not affected at all.
4.2 Land Revenue

Land revenue is basically a presumptive levy, although there are regional

diversities in design and construction. It is levied in almost all states on the
basis of land surveys, dating generally from pre-independence days.
Historically, land revenue rates had been fixed before independence (settled)
on cultivators or intermediaries.

Land revenue is today levied in the State under the State Land Revenue
Acts.A selliement is generally expected to be in force for 30 years.It is done
by dividing iand in to groups and fixing standard rates for each group.Groups
are formed taking into account physical configuration,climate and rainfall and
yield and prices of main crops. Other factors considered for grouping land for
land revenue assessment enumeratd in the Act are marketing and
communication facilities,the standared of husbandry,population and supply of
labour,agricaltureal resources,variations in area of oddupied and cultivated
lands between two settlements,wages,costs of cultivation of principal crops
and sale values of agricultural land.

The detail settlement procedure is laid out in the Land Revenue Rules.The
land revenue due is determined for each parcel of land bounded by survey
stones which is given asurvey number or a subdivision of a survey number at
the time of settlement or subsequent mutation (change of ownership or use.).
All productive land(that is all land that is assessed for land revenue) is
classified in annas by a relative assessment of productivity and quality:
unproductive land(pot kharab)is identified and exempted from land revenue.A
standard rate is determined for a homogenous group of lands with reference
to the average yield and the value of the principal crops grown over at least
2/3ds of the gross cropped area.A principal crop is defined as one that is
cultivated over at least 20% of the gross cropped area(5% if it is a cash
crop).Detailed procedures have also been prescribed for assessing each of
the variables that have to be taken into account for determining the land
revenue to be paid.The average crop yield, for example,is to be ascertained
on the basis of detailed data provided by the Village Accountant for all land
parcels grouped as good(classification value of at least 87%for plantation
and 69%for other lands),medium(classification value of at least 75% for
plantation and 37% for other lands)and inferior (classification value below
75% for plantation and 37% for other lands) land.

The lowest and highest standard rates/acre then fixed for different categories
of land are given below:

Lowest rate Highest rate

Dry land .64 paise 6.26 paise

Wet land 1.06 paise 23.02 paise

Garden land .96 paise 77.51 paise

Plantation land 6.25 paise 11.36 paise

While a settlement is in force, there are provisions for revising

assessment in certain situations and determing assessment on unassessed.
In practice, this happens while converting agricultural land for non-
agricultural use andchanging dry land into plantation land. Assessmentis
fixed in such cases with reference to the rate applicable to similar
neighbouring lands.

The government has been contemplating a fresh resettlement exercise for

some time.High court rullings interpreting the Land Revenue Act do
not,however,permit across-the-board revision of land revenue rates without a
formal settlement process.A possible loophole exists under section 204 of the
Panchayat Act which provides for levying a local cess equal to land revenue
but this has to be earmarked for local bodies. An announcement has also
been made in the budget for 2000-2001 about doubling land revenue and
transfer of the levy to panchayats.Simultaneously a proposal for conducting a
fresh summary settlement over a two year period at accost of about Rs.9 crs.
Is under consideration.A Cabinet sub-committee is likely to be constituted to
oversee the entire process.

In effect,therefore,land revenue is a kind of presumptive taxation of

agricultural income,but the tax base takes into account only income
realizable from the inherent productivity of the land (its physical features,
soil, location and the like).Benefits realized from technological improvements
and investment on land by the landowner himself,including those attributable
to irrigation facilities,have been specifically excluded in the acts presumably
to encourage long term investment under the predominantly dry land
cultivation characteristic of much of the State.Benefits realized from irrigation
provided by government investment are charged separately through user
charges or water rates.The presumptive nature of land revenue is based on
the land classification mechanism although tax due is fixed separately for
each parcel of land or survey number.Cost of cultivation and wages are also
considered but the standard rate of 4% is determined on gross not net
average crop yield for every class of land in a group. The most significant
feature of this form of taxation is its stability as there is only a very limited
inbuilt mechanism to vary the tax due from year to year.There is no provision
for indexing land revenue to inflation but there is a facility for specific
remission or suspension in the case of natural calaminities.Land revenue acts
themselves prescribe limits to permissible rate increases in most States.
The inflexibility of land revenue is both an asset and a disadvantage. It
obviates the need for costly, detailed settlement exercises. The flip side is the
increasing dis equilibrium between land revenue assessment and actual
productivity over the very long periods for which a settlement is in
force.,particularly when there are major technological changes in agriculture
as has happened

In the post-independence period. Large gaps between settlements induce

administrative inertia and delay the rate revision process. By reducing land
revenue liability to a pittance, the incentive to provide associated essential
services like the maintence of land records is again seriously diluted.

4.3 Suggestions for reforming the structure of Agricultural Taxation and Land
revenue

Since independence, different methods have been suggested for levying a

comprehensive tax on agricultural income. Economists have in general
criticized under taxation of the agricultural sector. Complaints of this nature
voiced by government committees coalesced in the setting up of the
committee on the taxation of Agricultural Wealth and Income. Familiarly
known as the K.N.Raj committee in 1972, which suggested levy of a single
Agricultural Holding Tax (AHT) in lieu of all direct taxes on agriculture to be
calculated by using the following procedure:

1. Dividing the country into homogeneous tracts on the basis of soil and
climate and differentiating them by crop groups.
2. Developing moving average annual output norms for crops based on 10
year yields and using 3 year market prices to calculate the gross value of
production
3. Netting out costs by multiplying the percentage of gross income retained
per hectare after deducting expenditure on material inputs and hired
labour(not family labour and irrigation costs) with value of gross output:;
costs were to be computed on the basis of norms drawn from existing
cultivation cost surveys and net income or rateable value determined.
4. Preparing schedules of rateable value/hectare for different crops and crop
groups for each tract; each crop group was to be given a single rating in
terms of rateable value.
5. Arriving at assessable rateable value by deducting water charges actually
paid for privately irrigated land or allowing a 20% rebate for privately
irrigated land.
6. Allowing a development rebate of 20% subject to a cap of rs 1000
7. Taxing net income at 0.5%.
8. Taking the family and the operational holding as units for taxation.
9. Applying a uniform methodology for the country.
10.Introducing the tax in two phases by tackling operational holdings with
assessable rateable value above Rs.5000 in first stage.
The classification was, therefore, to be based on the productivity potential
of the land,not on the actual crop grown although tax incidence would be
based on a concept of average rateable value.The gross value of output of
an acre of poor dry land was to be computed.The State was to be divided
into 4 homogeneous zones and equations to be worked out for different
land categories separately for each zone; there was a provision to rework
equivalences between different land categories every five years.
An agricultural income tax would supplement land revenue which could be
separately indexed to product price inflation. Agricultural activities
(including floriculture,aquaculture and other land based activities) with tax
potential within an area are to be identified by district planning
committees and sent for survey and income assessment to the State
which is better equipped to undertake such studies.This will provide room
for considering regional diversities and requirements and occupational
changes within the agricultural sector.The authors have suggested that in
the interest of horizontal equity, field surveys should take into account
imputed costs of family labour and home-produced inputs while assessing
income derived from agricultural activities.The surplus generated for each
item over total variable cost should then be plotted and a threshold fixed
at the yield at which the percentage stabilizes.Activities with no income
stability should not be taxed on presumptive basis. Under such a system,
annual assessment will be required only for farmers growing any of the
few designated crops.Assessment at pre-determined levy rates per acre
would be done only when a farm moves above the prescribed yield
threshold and the applicable rate would be worked out at the threshold
not average yield.
Land owned by a taxpayer would alone be taken into account for
computing taxable income not operational holding. Adjustments could
also be made to ensure that the tax burden falls only on income earned
from marketed surpluses in the case of food crops.7.50 Since garden crops
are subject to less diversity and income uncertainty, yield and land use
are reasonably stable and not dependent on irrigation and soil suitability
may be taken as given, it has been suggested that in their case, actual
yields should be taken in to account, rebates given for earlier years and
annual scaling done till the crop reaches normal yield levels. Such land
categories are to be converted in to equivalents of dry-poor land and the
same rates of tax applied on the basis of the expected annual average
gross income per acre and comparison of the tax incidence on garden
crops in relation to irrigated non-garden crops. Gestation periods should
be taken in to account while determining tax exemptions. Panchayats are
to be authorized to levy the supplementary tax proposed above on crop-
specific basis; they would also retain the revenue and can use it to
improve local agricultural infrastructure.
 The main issues raised in the debate on taxing agricultural income
over the last three decades seem to be the following:
1.There seems to be general agreement about the need to improve and
generalize
the taxation of agricultural income but there are divergent views about
retaining land revenue and adding on another levy or replacing land
revenue by a totally new tax.
2.The importance of a presumptive approach has been recognized by all
writers but opinions vary regarding the extent to which account-based
assessment should be insisted upon given poor information base.
3.Whether tax should be based on operational or owned holdings and on
the family or individual is in dispute.
4. Whether there should be a generalized tax or scope for local variation is
not clear.
5. Whether family labour should be treated as an imputed cost is under
debate.
6. Different methods of yield and crop valuation have been proposed but
there are several common features in the proposals.
7. The ticklish question of exemptions for those at the bottom by holding
size or threshold yield has to be resolved.
8. The tax rate and whether it should be specific or ad valorem has to be
considered.
9 .Further deductions for encouraging investment and development have
been suggested.
10.How to treat garden crops and other land-based occupations is a major
problems.
11. A transparent, easily operated method of remission in the case of
calamities and price fluctuations has to be instituted.
Despite widespread dissatisfaction among economists with the
inadequacy of the current system of taxing agricultural income from the
equity and efficiency points of view, it has not been easy to develop a
practical and acceptable replacement that would suit the changing
technological and occupational structure in rural areas.It is widely
believed that the agricultural sector is under taxed. Statement to this
effect are frequently made by economists and policymakers. The Planning
Commission and the Union Finance Ministry regularly refer to the
untapped fiscal potential of the agricultural sector. We have, therefore,
attempted to estimate this potential,as a prelude to recommending
appropriate tax policies.
This simplest method would be to update the existing land revenue
assessment in line with inflation. Unless the Land Revenue Act is
amended, the formal settlement procedure, which provides for public
notice of revised rates and disposal of objections received, will have to be
observed. The department estimates that settlement without resurvey
will take around two years and cost about Rs. 9 crs. A more detailed
assessment of tax potential might be possible by individually estimating
net income/hectare for some major crops. We have chosen a fewimportant
agricultural(sugarcane, paddy, maize,ragi,jowar,groundnut,tur, cottonand
sunflower)and horticultural(potato, onion and coconut) crops using
secondary data and looking at the most widely grown variety under
typical watering conditions. Two methods of cost estimation are being
done today for agricultural crops,one based on farm management studies
finalized annually by a committee of officials and researchers and another
calculated by the department for determining the scale of finance for crop
lending.The former takes into account not only variable costs,but also land
revenue and items like interest on investment and working
capital(estimated),depreciation charges, risk premium(estimated on
variable cost), managerial cost(standardized),rental value(Estimated on
gross income) etc. These estimates are done by the Agricultural
Department for making recommendations to the Central Agriculture
Department regarding fixation of minimum support price.
The two methodologics use different methods for calculating variable
costs. Calculations based on farm management studies rely on the
quantity of inputs actually used on farms and prices prevailing at the
relevant points of time but scale of finance costing is based on the
package of practices recommended for different crops by the Agriculture
department. The latter set of costs tends to be higher than the former
since agriculturists may not apply all the recommended inputs or labour
for the prescribed number of man days. Cost estimates based on farm
management studies(depending on practices adopted by farmers,not
those recommended to obtain optimal results) reflect field level
realities.We have, therefore, chosen the results of these studies for
estimating income from major crops. We have not taken fixed costs into
account,except for one element; taxes like land revenue and related
cess.Although market prices during the season for each crop in the main
market in which it is traded in the State have been used to estimate gross
incomes for three different years,to even out the effects of substantial
price variations, average prices have been computed by excluding price
levels which are substaintially different where required. The results may
be taken to be purely indicative.
From limited analysis, the most remunerative rain-fed crop
appears to be cotton, but even with net surplus per hectare estimated by
us,only a person with a holding in excess of 10 hectares would have
taxable income if the current exemption and standard deduction levels for
non-agricultural income tax are applied.At the other end of the scale, a
holder of double cropped irrigated land might become liable to tax with a
holding of around 2 to 3 hectares. The income estimation made by us
indicates threrfore that small and marginal holdings would in any case be
below the exemption limit.
 Since deduction s for savings, investment, development,
insurance, climate and price fluctuations etc. ought to be given for
agricultural income tax payers, it would be logical to assume a higher
exemption/deduction limit of Rs. 1 lakh.
4.3.1 Horticulture crops
In the case of horticultural crops, cultivation
requirements differ between orchard type crops like coconut and annual
crops like vegetables. The latter are grown over periods of four to six months,
while fruits are cultivated in orchard type operations involving heavy one-
time investment on planting and limited annual maintenance expenditure.
Among the major horticultural crops of India, cultivation costs have been
estimated by the State governments in recent years for onion and potato for
market intervention operations at the State level. these were also approved
by the Government of India in 1977.Mango, chillies and arecanut have not
come under market intervention mechanism. Estimated annual net income
from potato, onion and coconut prepared by the department is presented in
Table II. In the case of coconut, only annual maintenance charges have been
taken into account for calculating net income, not the initial cost of
establishing an orchard. Substaintial price fluctuations seen in the case of
coconut indicate the extent to which net income from a major Horticultural
crop could vary from year to year. We have not made an assessment of the
tax potential from horticulture since it is far more differentiated than
agriculture, cultivation is not often concentrated in clusters and income
fluctuates widely from year to year because of price variations attributable to
the instability of current marketing arrangements. When it is undertaken on a
large scale through organized marketing agencies geared to a reasonably
predictable demand, it could prove to be a growing source of income which
could be taxed by the government.

The revenue potential of a return-based tax on agricultural income

from non-plantation crops may not be very high. It would also require
elaborate administrative arrangements which might be difficult to maintain at
a high efficiency level and may not be cost effective. In the short term,
therefore, we see little justification for a return-based tax on all agricultural
crops particularly if it is designed to replace land revenue like the Agricultural
Holdings Tax.

4.3.2 Land Revenue

A better alternative that we propose for immediate

adoption is amendment of the Land Revenue Act to permit annual
indexation of rates. The price index that we would suggest for
adoption is the Consumer Price Index For Agricultural
Labourers(CPIAL) that is regularly prepared on a monthly basis by
the Shimla Labour Bureau. The index is not directly based on the
prices of agricultural commodities, but it uses a basket of items of
daily consumption of agricultural labourers, which may be
considered an acceptable substitute. Arrangements
will,however,have to be made to make the annual indexation as
transparent,objective and public as possible to ensure that even the
smallest tax payer is not at the mercy of unscrupulous officials to
know his tax liability. The announcement of rates should also be
done before the main kharif crop season commences in June. This
may not be difficult,since Labour Bureau data for the last month of
the previous year is available within a month of the close of the
year and annual averages can be immediately computed and
applied to land revenue rates. The computerized information
network proposed for district revenue and panchayat administration
should be used to disseminate assessment rates. Remissions now
given for small holders should also be removed and cess merged
with the main tax.

An eight fold increase in land revenue rates may not be

acceptable unless it is accompanied by visible benefits to
ratepayers.Price indexed land revenue rates should be introduced
only when computerized RORs are made easily available through
kiosks in villages to facilitate the paperwork required for agricultural
lending.

By recommending indexation of land revenue rather

thanintroduction of a return-based comprehensive agricultural
income tax on all crops, we are not shutting our eyes to the inequity
of the current income tax mechanism or the legal loophole available
for evading non-agricultural income tax(more precisely for
converting black money in to white).newly developed occupations
which fall under the definition of agricultural income like
floriculture, pisciculture and forestry generate surpluses,which
should not escape taxation.

The number of cultivators making such investments is also

growing over time. We believe that there is a strong case for putting
in place a levy based on self-assessment (with provisions for
presumptive taxation) for occupations like horticulture, floriculture,
social forestry, pisciculture and similar activities as quickly as
possible. This will supplement the basic restructured land revenue
suggested above. We recommend immediate action to undertake
the required surveys and develop productivity parameters for such
avocations.Data available with financial institutions, which lend for
such activities or refinance them like NABARD, could be used for
computing presumptive taxation.
 In the interest of horizontal equity,rates are not being
modified annually to align with income tax rates. It is therefore
recommended that effective tax rates for agricultural income tax
should be brought on par with those applicable to non-agricultural
income tax. The rate and method of depreciation should also be
similar. There may be no case for providing fiscal incentives for
exports undertaken by grower exporters(direct exporters) similar to
those available for industries under section 80HHC of IT Act or for
investments made in R & D, since there is already a replanting
allowance and such fiscal incentives are themselves not justified in
tax administration. While not recommending increase in the
composition limit from 150 acres to 500 acres as in Kerala, we
suggest annual determination of composition rates to ensure that
price fluctuations for each season are taken note of so that undue
hardship to cultivators avoided.The replanting allowance which was
fixed several years back should be revised keeping in mind inflation
over time.

Whenever a taxpayer declares agricultural income above a

fixed limit in his income tax assessment, it should be treated as
such under the Agricultural Income Tax Act and subject to tax. The
Finance department should a on presumptive basis as agricultural
and non-agricultural and take appropriate action from the point of
view of revenue as well as taxpayer compliance.

4.3.3 Local bodies and agricultural taxation

Indira Rajaraman and Bhende(1998) have rightly

emphasized the fact that land-based taxation which bears clear
jurisdictional markers is appropriate for local governments. They
point out,however, that there is little incentive to improve buoyancy
if revenue is shared on per capital basis or on a redistributional
formula and not on origin basis. They suggest, therefore, that land
revenue should continue to be levied as at present but the decision
of whether to impose or not the additional crop-specific tax
recommended by them should be left to panchayats. In their
view,collection of the tax should continue to be done by existing
administrative mechanisms; this responsibility may be handed over
to panchayats when they are suitably staffed.

Karnataka has for several years had a local cess on land

revenue which is absorbed into general revenues out of which funds
are devolved to panchayats as determined by the State Finance
Commission. There is also no system like that in Gujarat,Rajasthan,
Madhya Pradesh, Tamilnadu and Uttar Pradesh of allowing
 panchayats to levy a capped cess on land revenue. In our view,land
revenue is suited for levy by panchayats. Local knowledge is
needed for applying the tax and if taxpayers perceive a close
relation between tax payment and benefits received, Compliance
and fund utilization improve. I suggest, therefore, that government
seriously consider transferring the levy to panchayats to strengthen
their financial responsibilities.

4.3.4 Capital Gains

Now scenario of rural area is changing.National

highways or state highways have changed scenario in the importance of
rural land. Value of the land beside the NH/SH has gone up very-very high.
That type of land are now being used for commercial purpose also.They
are recorded as agricultural land but are misused as taxation point of
view. Purchase and sale of land is now resulting in capital gain,but the
seller are taking benefit of provision of Income-tax Act related to
agricultural income.

Now it is required to make separate provision about the land beside

NH/SH. It can be categorized separately and higher land revenue can be
imposed on the land,especially on the land which is also near village.
Another step can also be taken. If an agricultural land is sold to non-
farmer,capital gain can be imposed. Tax rate can be differentiate on the
basis of the status of the purchaser. If the purchaser is individual(or other
than company/firm), then lower tax rate can be imposed,butin the case of
company/firm,higher rate can be imposed.

4.3.5 Real Estate

The introduction of special economic zones popularly known

as SEZ by the government of India has also resulted in the growth of real
estate market in those rural areas which were earlier unaware about it.
The foreign real estate companies are very much interested in the real
estate market of India because there is huge scope in Indian markets. The
need of the people have changed according to the change in culture. The
malls and flat culture has taken places in the minds of Indians. The need
for land for such malls and other modern commercial complex has raised
the demand of big lands in metro cities as well as in rural areas.MNCs or
other commercial sectors are now taking benefit( or misuse) of the
provision about agriculture sector.
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