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Why Jaitley is right in going after “Agricultural Income”

Recently, Arun Jaitley picked up a very tricky issue. He said in Parliament that many prominent people are being probed for allegedly concealing taxable income as agricultural earnings as he told the Opposition not to term it as political victimisation if their names come out. Apparently, IT department Assessing Officers across the country, as part of a recent directive, have been asked to “verify” a select number of cases in this category under assessment years 2011-12 to 2013-14.

The move came in view of a PIL filed in the Patna High Court where concerns have been raised that some of these declarants could be engaged in routing their un-accounted or illegal funds in the “garb” of farm income thereby leading to instances of money laundering.

This action from the IT Department, may seem ill-timed considering that the Government was trying hard to shed its anti-farmer image by just delivering a pro-farmer budget. Sure, the intention of the action is to bring to book those “farmers” who are misusing the tax-free status of agricultural income, but to a layman reading the reporting by Indian media, it can seem to be a move affecting all farmers. Add to this the spin from spin-meisters and politicians and this can snowball into a huge controversy. But Jaitley is not wrong in going after this “mafia”.

Agricultural Income in India is tax-free and this is an extremely common avenue through which black-money can be routed. As the system goes in India, the income declared by you in year one will generally come up for scrutiny (if at all) by the IT Department a good 18-24 months after you have declared it. Agricultural income, is such a source which can be easily manipulated in such a span. Say you have a large plot of land, you can very well claim to have earned a good sum by selling its produce in year 1, and by the time year 3 comes and the taxman asks you tough questions, you can claim the crop went bad or that you just stopped doing the farming activity.

Anpther flaw in the rules is that there is no threshold for agricultural income to be tax-free, i.e. irrespective of how much money you earn via agricultural activities, it is all tax-free. This makes no sense. There is no logical reason why a “farmer”who makes a net profit of Rs 1 crore pays no tax, while a corporate doing the same amount of business pays in excess of 30% in Income tax alone. A really bold move, after these tax enquiries, would be to stop this largesse and decide a threshold, beyond which agricultural income is no longer tax-free. This will catch the super-rich genuine farmers as well as some other “farmers”.

In fact, the rot in agriculture related activities goes much further. A few years back, when I was auditing the accounts of a big nationalised bank in a rural village, I saw for myself the possibilities which our rules allowed. A business family from Mumbai, lets call them Singhania for convenience sake, were doubling up as farmers in a village hundreds of kilometres away. The village was not their home-town, they just owned large tracts of land in the village, which was known to be a mango centre.

The modus operandi for all of them was similar. All of them were owners of a private business entity in Mumbai which had many properties. All of them, in their personal names, held properties in the village too. All of them, picked up agricultural loans from the local village bank for “mango farms”. For all the loans, the collateral security was common: Their head office building in Mumbai. All the paperwork was spotless. But the collective exposure was substantial, for a small sized village bank branch.

The amazing part starts now. I may not be able to recollect all figures in exact, but the you will grasp the essence. First off, agricultural loans are way cheaper than standard loans. The interest rate applied to these loans was 8%, which is to be given to “farmers, who are cultivating”. Secondly, the repayment of agricultural loans is always linked to the underlying crop for which the money is borrowed. In this case, since the loan was for a mango farm, and since (as we were explained) a mango tree takes a good 7 years to bear fruit, the agricultural loan had a moratorium of 7 years.

You can add up the pieces: a business house, through its owners, comes to a remote village and gets cheap money, with no immediate repayment. As part of our checks, we insisted on a site visit. The farm looked fine, but we had no idea whether it would bear enough fruit to be able to repay the loan amount after 5 odd years. All we could was make a note in our report, after all, the paperwork was all fine.

The recent NPA storm which has hit Indian banks may as well be a result of such deals, among others, which were struck in the past. While the benefits granted to farmers maybe necessary, the loopholes which allow misuse of such schemes must also be plugged.

The Government’s move to finally look at this segment which was hitherto left untouched may herald the beginning of a relook of all schemes of this sector. Some of the moves needed to stem the rot in this field will require tremendous political capital, especially when you have a rich “kid” ready to jump into a kurta and shout “suit-boot” ki sarkaar, even as darbaari journalists clap in awe.

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