How are agriculture and taxation related? If we survey the world as a whole we find a multitude of practices and policies applicable to agriculture in respect of taxation. The purpose of this article is to discuss the underlying principles rather than concrete policies and practices prevalent in individual nation-states. Taxes come in varied forms and nomenclatures; nevertheless they are all levied by the State to meet both fiscal and non-fiscal objectives. Thus duties, surcharges, cesses are all taxes. However public services rendered by the State for which citizens pay directly cannot be termed as tax, an example is highway toll, license fees or electricity charges. Taxes can both be direct and indirect. They can be imposed at different tiers of the government such as national, provincial and local, depending upon whether the State is unitary or federal in its structure. Economists disagree on whether taxation of agriculture leads to incentivization or its reverse and whether it will lead to a spurt in growth and development. An optimal level of taxation has often been seen to augment commercialization and enhanced application of technology.
Agricultural tax can be levied in a direct form on income, assets as well as on capital gains. Indirect taxes constitute levies on irrigation, drainage, machinery and equipments. A cess levied on acreage of crops or based on their market value or livestock or even fisheries can also be termed as a direct tax. The principles or the canons of taxation will not change and are identical to the taxation system as a whole. The canons of taxation are the pillars on which the whole principle of taxation is based and they have remained unchanged since the classical economist Adam Smith formulated them in 1776. The seven canons are:
- Equity( contribution proportionate in respect of ability to pay)
- Convenience(time and manner of payment must be reasonable )
- Certainty(should not be arbitrary and vague)
- Efficiency (revenue collected must be greater than cost incurred)
- Legitimacy(to distinguish it from extortion, should have the sanction of law)
- Power to levy( can be levied solely by a legitimate public authority such as the State)
- Obligation to pay(A citizen is statutorily obliged to pay taxes, it is not a voluntary payment as a charity)
The need for taxing agriculture is more acute in developing countries because of its higher share in the GDP. Many nations as a measure of policy exempt agricultural income and even capital gains through sale of agricultural land from tax, provided such capital gain is re-invested in the acquisition of agricultural assets within a stipulated period of time. It has to be offset however by increasing land taxes which generally are levied at provincial or local levels. It will be pertinent to discuss the two most prominent form of agricultural taxes which are prevalent in most parts of the world.
1. Income or profits from agricultural operations.
2. Taxes on agricultural assets or property such as land, livestock, fishing zones etc.
Agricultural income or profits are calculated on an annual basis under the accrual system of accounting. Such income/profits accrue through sale of agricultural produce or provision of services like supply of labor, storage &transportation, processing etc. Historically though taxes on income/profits have been levied based on other criteria such as annual turnover or the cadastral(survey) system where the revenues/profits are calculated on the area of land, soil quality, composition of livestock etc. There have been arguments both in favor of and against imposition of such taxes in different countries. They are listed below.
Proponents of income/profit tax:
- Increase in prices of agricultural goods and services.
- Concealment of Income.
- Increase in government revenue
- Increase in tax base
- Better utilization of land resources
Opponents of income/profit tax:
- Assessment can be a tedious job
- Not suitable for subsistence farming
- Complicated taxation system
- Farmers will find it burdensome
- Will reduce employment
- Reduction in cropping area
Saving potential would be discouraged
Asset or property tax in agriculture is levied on the following basis:
- Fixed assessment
- Fluctuating assessment
- Fluctuating assessment with a sliding scale
- Fluctuating assessment with sliding scale for some types of crops and livestock and fixed for others.