DR. Ambedkar’s views on Agriculture Income Tax

                                 DR. Ambedkar’s views on Agriculture Income Tax


Introduction:
Dr Ambedkar’s personality was towering and multi-faceted. He had
extensively written on both most complex and technical, as also
theoretical issues, including pressing day-to-day economic problems. He
was essentially an economist by academic training and a recognized
researcher in problems pertaining to public finance and political
economy. This paper deals with his views on taxes on agriculture
income in India and its relevance in the present context. From last two
decades or so there is debate on taxing on agricultural income, most of
the leading economists are in favor of taxing agriculture income.
However, land lords, have strong lobby in Indian politics and consistently
they are opposing taxes on agriculture income. Dr. Ambedkar have
argued this issue before eight decades or so and favored the taxing
agriculture with sound reasoning his views are very much relevant even
in present context.
Role of Taxation in developing country like India
According to Dr. Ambedkar, the socio-economic development of an
economy depends primarily upon the availability of adequate finances
and their proper utilization. In India, taxation was assigned the central
task of collecting sufficient revenue to finance economic development
program in spite of low ability to pay taxes due to extremely low levels of
income and consumption. The essence of revenue function of taxation
policy in the initial stage of development was to cut down the existing
level of consumption, particularly of well-off sections, and mop up the 2
savings for public investment. However, as income rose consumption
levels were to be prevented from rising and additional revenue
generated1
. The strategy was to channel an increasing proportion of
incremental income into building development infrastructure. Taxation
was the main fiscal weapon available to the government for this purpose
and it has to be used to the hilt. Taxing at progressive rates partly as
revenue and partly as equity measure, the government attempted to make
both direct and indirect tax rates progressive. However, it is to be noted
that the merit of progressiveness has been lost while implementing it in
letter and spirit.
Trends in Tax-GDP Ratio
Taxation level of a country is traditionally judged in terms of the ratio,
which taxes bear to some measure of national income aggregate. Change
in the ratio is determined by variations in both the numerator (Total Tax
Revenue) and the denominator (National Income). Tax-GDP ratio is
generally regarded as an index of relative tax burden in a country over a
period of time or when countries are compared for the same period.
Tax-GDP ratio indicates the percentage of national income that is
compulsorily transferred from private pockets to the public exchequer.
Hence, it signifies the relative share of the government in the disposition
of national income. Tax-GDP ratio is determined by such factors as the
level of per capita income, composition of national income, size of the
foreign trade sector, and the degree of monetization in the economy. With
the launching of the five-year plans in 1951, and expansion in
administrative and welfare activities of the government at different levels,
the need for revenue increased and it was met mainly by additional tax
1 Dwivedi, D. N. [1994], Readings in Indian Public Finance, P. 22, Wiley Eastern
Ltd., New Delhi 3
efforts. Consequently, Tax-GDP ratio started increasing in India, being
4.78 per cent in 1960-61, 6.17 per cent in 1970-71, and 7.66 per cent in
1980-81, and 8.99 per cent in 1990-91. However, it declined to 8.05 per
cent in 1995-96, but again it increased to 9.91%, 11.26% and 12.49%
respectively during the 2000-01, 2005-06 and 2006-07. However, though
it shows increasing trends but the growth rate is very slow as compare to
the size of our corporate sector and service sector. Thus there is a lot of
scope to increase tax net.
Dr. Ambedkar’s Approach:
Dr. Ambedkar vehemently criticized the revenue system of British
Government. His main criticism of the revenue pattern of British
government of India was on the ground that it was against the interests of
the poor people of India. Further, there was no justice or equity in tax
policy. According to him, land revenue was highly oppressive. Therefore
he argued that the government should undertake legislation to make the
tax policy more equitable and elastici
. According to him, the first and
most essential requirement of good tax system is that it should be reliable.
It does not matter whether that revenue system brings in large revenue or
small revenue but whatever it brings it ought to be certain in its yieldii
.
The main features of taxation policy as advocated by Dr. Ambedkar were
as follows.4
1) Tax must be levied on taxable capacity or income.
2) It must be progressive ie the rich must be taxed more and the poor
less.
3) Exemptions to tax payers should be allowed to those who have
income below a certain limit.
4) Land revenue item must not be rigid but elastic and subject to
variations.
5) There should be equity in taxation.
6) No taxation system should be manipulated to lower the standard of
living of the people.
7) There should be efficiency in taxation.
Dr Ambedkar emphasized the necessity of changing the attitude towards
the taxes. Therefore, he suggested taking immediate efforts to rectify the
inequalities in the general system of taxation. Particularly he had the great
objections to the then prevailing system of levying land revenue. While
participating in the debate in the Bombay legislative council, he said that,
the tax system of the Bombay presidency was inequitable and hence
indefensible. According to him the land revenue, whatever may be the
play of words whether it was tax or whether it is rent, there was no doubt
that, land revenue was a tax on the profits of the businessman and
therefore, there should not be difference in the methods of levying the tax
on the income from agriculture and business. But in the case of land
revenue every farmer, whatever may be his income was brought under the
levy of land tax, while under income tax no person is called upon to pay
the tax, if he had not earned income during the year. Such system was not
made applicable to the land revenue. Whether there is a failure of crops or
abundance of crops the poor agriculturist was called upon to pay the
revenue. Further, the income tax is levied on the recognized principle of
ability to pay. Under the income tax, the holders of income below a 5
certain minimum level are exempted from tax payment. But under the
land revenue system the tax was remorselessly collected from every one
farmer whether he is rich, holding more than hundreds acres of land or a
poor farmer holding one acre of land. Therefore, he sought the
redemption from oppression and exploitation of land revenue system
immediately.
Land revenue system
The foundations of modern land revenue system in India were laid during
the period of the Mogul dynasty, the East India Company strengthened
the land revenue system by introducing permanent settlement in Bengal
and Bihar and subsequently this was extended to the other parts of the
countryiii. Under the Government of India Act 1935 the land revenue was
assigned to the states and the same is incorporated into the Indian
Constitution in 1950 and then State Governments have attempted to have
their own independent land revenue system, though the basic structure
has not changed more. Even on the eve of Independence, land revenue
was an important source of tax revenue in India. But thereafter its
importance drastically declined. Land taxation in general has a great
value of both revenue and non-revenue purposes. On revenue side land
tax causes no distortion of output prices farmers are encouraged to
produce at high level because they receive the full price for their crops.
Arguments for taxation:
Revenue argument is undoubtedly a strong justification for land taxation.
Non-revenue objectives of land taxes can encourage land reforms. If the
land tax rates are very high and progressive and impose heavy burden on
large landholders, they will be forced to prefer smaller holdings and that
will be of help in reducing the concentration of land in the hands of a few
landlords. Land revenue is a levy on acreage basis in India. Therefore
land tax is not a progressive levy since there are no graded rates and also 6
since the rates are not related to net income from agriculture. In its
present from it is highly inequitable because it is levied at a flat rate per
acre without taking in to consideration a large and small size of
landholdingsiv. Therefore, the tax burdens not equitably distributed.
The Taxation Enquiry Commission (1953-54) recommended the revision
or tax taking into consideration the changes in prices of agricultural
products. But government of India did not take it seriously. In India,
political considerations are more important in the case of land taxation
than in any other from of taxation. Therefore it is difficult to get political
support for any move that leads to an increase in the tax burden on the
agricultural sector. Farming lobbies act as interest groups and put up
strong resistance whenever the government attempts to mobilize more
revenue from the agricultural sector. Several proposals were made in the
fifties and the sixties for reform of land revenue system, but none of them
were accepted and implemented. A very valuable and by far the most
comprehensive study of agricultural taxation is the one undertaken by the
committee on taxation of agricultural wealth and income (1972)
familiarly known as K. N. Raj Committee. Unfortunately, the
recommendations of this committee also went into cold storage. To
remove the deficiencies of the existing system of taxation of agricultural
income, a drastic change in the system is needed. What is needed is a
unified system of taxation of agricultural and non-agricultural incomes
and for this purpose taxation of agricultural income must be taken out of
the state list through a constitutional amendment and an integrated system
of taxation of agricultural and non-agricultural incomes must be
introduced.
The Central Government and the Planning Commission have emphasized
on the necessity of raising additional resources from the agricultural 7
sector. Yet, the fact of the situation is that when it comes to practical
implementation the central government cannot do anything in the matter,
as agriculture is a state subject. The long-term fiscal policy (December
1985), recognized that taxing agricultural income presents many
conceptual and administrative problems. Land revenue and taxation of
agricultural income are states subjects under the constitution. The centre
has no intention of seeking any change in the position. On such inability
of central government the Sarkaria commission observed that such an
approach however does not solve the problem and the reforms in sphere
of agricultural taxation are long overdue. There is in general unanimity
that at least the large landlords should be taxed. A suggestion often made
is that in order to overcome the resistance by interested groups and in the
interest of uniformity in taxation the union may levy a tax on agricultural
income and its net proceeds be assigned to states.v
It has also suggested
that in the interest of the raising revenue and uniform tax on agricultural
sector the Union Government might levy this tax as per arrangements
under Article 268 of the Indian Constitution.
Political domination of Land Lords:
Taxes on agriculture have remained generally untouched since several
years in India. On the contrary, land revenue on agriculture has been
either dropped or reduced considerably. On many occasions the State
Governments competed with each other to provide relief to the
agriculturists by giving them tax concessions or by abolishing some taxes
altogether rather than taxing themvi. As many economists point it out,
land revenue from agriculture income is inelastic. It does not increase
with the increase in prices of agricultural products. This trend is in the
favor of pretty agriculturist. The affluent peasantry, who constituted
perhaps the most powerful group within the Indian coalition, successfully
imposed three conditions on economic policies. 8
1) Land reforms should not be pushed beyond a certain point,
2) There should be no taxation of agricultural income and wealth,
3) And the state should maintain high prices for outputs and low prices
for major inputs and thereby maintain a budgetary policy with heavy
subsidies.vii With the provision of irrigation and modern farm techniques
production has became more stable. The farmer also gets an assured price
for his product. Agricultural income is now quite high and stable. It is fit
enough to be taxed like any other income.
It is necessary that agricultural income is now brought under taxation.
The surpluses generated in the farm sector are large and are increasing
year after year. The upper income groups are taxed in the urban areas, but
their counter-parts in the agriculture sector are not being taxed. In
principle, the agriculture income should be taxed the same way as urban
income. The use of new technology and diversification in agriculture to
horticulture and shrimp farming has raised income from agriculture. Now
even with the land ceiling there is a case for taxing agricultureviii. The
small or marginal farmer will not be against the large farmer being taxed.
In any case, there is a very good economic rationale for taxing
agriculture.
From, the point of view of horizontal equity, as far as possible, all
incomes should be treated in the same manner for tax purposes. Hence,
income from agriculture should be subjected to the same tax treatment as
non-agricultural income with the necessary adjustments to take care of
the special characteristics of agricultureix. The economic rationale is
impregnable. That does not mean that agricultural income tax will be
introduced in the next budget or so. That is because there has not been
any change in the political perception. If at all, farmers have been
pampered more than ever, farm inputs like fertilizers, electricity, diesel, 9
etc are heavily subsidized. That is the price the politicians have to pay for
winning their supports.
Conclusion:
Taxation on agriculture income is good for economic health of the nation.
But the powerful landlords lobby is constantly creating obstacles in the
way of implementation. Therefore, this sector is remained untouched
from any changes in tax pattern. Hence, change in political attitude and
determination is necessary for taxation on agriculture income in India.
i Khairmode C. B. (1992) Dr. Ambedkar Chartra, Vol. 7, Maharashtra Sahitya Mandal
Bombay P. 48.
ii Dr. Babasaheb Ambedkar Writing and Speeches (1982) Vol 2, Government of
Maharashtra, p. 164, Mumbai.
iii Sreekantaradhy B. S. Structure and Reform of taxation in India, Deep and Deep
Publications, New Delhi 2000, p.72
iv Shrivastava Madhuri (1981) Fiscal Policy and Economic Development in India,
Chug Publication, Allah bad P.168.
v
Sarkaria Commission Report Government of India (1983) p. 263.
vi Mungekar B. L., Taxing the poor, The Independent, London, Date 22nd February
1994
vii Mrinal Datta-Chaudhuri, Journal of Economic Perspective, Vol 4, Number 3-
summer 1990, Stanford University, Stanford C A 94305-6072.
viii C. H. Hanumantha Rao, the Economic Times, Bombay, August 24th 1995.
ix Raja J Chelliah, the Economic Times Bombay, August 24th 1995.