Lagaan, Once upon a time in India

What if Bhuvan’s team in the ‘Lagaan’ movie had lost the cricket match? The consequences of failing to pay the imposed lagaan would have meant outright loss of land rights, which would be subsequently auctioned off and farmers would have eventually becoming labourers.

In the British Era, farmers paid more than one third of their average produce as lagaan (agriculture tax), even during the times of poor yield. The farmers paid lagaan to an intermediary (raja / zamindar), who kept 1/11 portion as the collection charges for their British masters. This agriculture tax contributed to half of the total revenue of the British Raj and about one third of agriculture related revenue came from the land auctions, as many intermediaries failed to deposit the imposed tax on a non-negotiable date (under the draconian ‘Sunset Law’) and consequently their lands rights were confiscated and transferred to the highest bidder. Every year about ten percent of intermediaries were replaced by the ones applying extreme oppression practices to extract lagaan. That is why zamindars are normally portrayed as villains in our movies.

During British colonial era high taxation practice led to a gradual deterioration of income of India’s people who were primarily dependent on agriculture. India's share of the world economy declined from 23% to 4%. Parliamentarian Sashi Tharoor stated that in terms of today’s value the British Raj siphoned out USD 45 trillion from India during their 200 years of rule.

The major source of income to run any ancient kingdom across the globe was taxes levied on agricultural income. This is documented in our ancient texts (Vedas, Ramayana and Mahabharata etc). We can find comprehensive treatises on taxation documented in the text ‘Arthashastra’ that dates back to 2,300 years. According to Arthashastra, it is the duty of the king to collect taxes from the large section of his subjects in order to protect its people and provide welfare to them. Taxation of up to 1/6th of the total income (could be lower) was defined as appropriate. This tax rate could be fairly raised if the state has built agricultural infrastructure such as dams and canals. The upper limit of sum total of all forms of taxes to any individual should not cross 1/4th of his/her total income even during emergencies. There were provisions of sin taxes of up to 50% on forbidden activities like prostitution, gambling etc. Arthashastra remained the golden rule book for drafting taxation rules for various kingdoms.

Subsequently, in 1580, emperor Akbar formalised an intermediary tax collection entity called ‘Jagirdar’, which had both judicial and tax collection authority. During his regime, extensive documentation was kept about scientifically calculating income of farmers based on average production of different crops, land quality, as well as the average prices prevailing over the previous ten years. Jagirdari system was later replaced by Zamindari system by the British, but without the judicial power. After experimenting with multiple taxation practices, British introduced a comprehensive law in 1922, which defined agriculture tax as a state subject and the same was adopted by our founding fathers post-independence. As per Indian constitution under section 269, the right to impose tax on agricultural income lies with the states, but none of the states dared to impose agriculture tax. At the time of independence, the agricultural industry contributed 54% to India’s GDP and about 75% of the population depended on it.

According to the 2018 Farm census, up to half of the country’s population was employed in agriculture and the sector contributed one fifth of GDP. About 10 cr (100 million) people own farm lands and about 86% of them hold less than 2 hectares each and 0.5% of the farmland owners own farm land of more than 10 hectares (about 25 acres) each. Almost every government since the country’s independence has formed committees to study tax on agriculture. However, not even the most powerful government (in terms of seat share in the respective assemblies) had courage to implement any of the expert recommendations.

India’s tax revenue to GDP ratio stood at 12% in 2018 (taken for pre-covid comparison) which is about three times less than that of developed nations. In order to leapfrog ahead and enter the OECD league, we need to double this ratio within the next 5 years. This ratio was 29% for South Africa in 2018 and there the farming income is taxable at par with income from any other source.

After excluding polulation engaged in agriculture (50%) and informal sector (45%), we are left with just 5% of the salaried class households, working in the formal sector whoes income is traceable and taxed at source on crossing the threshold. Our per capita income is less than three times of taxable income slab, the average family size is 4.8 and there is low representation of women in the taxable income category. Despite such disparity, 2 cr. (20 million) individuals reporting their income of more than ?5 lakhs (0.5 million) is a great compliance achievement of our government.?

Our tax collection is so low that the government is compelled to declare some items are luxury goods while they are considered as basic necessities in most of the countries. Two wheelers, air-conditioners, washing machines, refrigerators are among the 227 items which attract 28% rate of GST (VAT-Goods and Services Tax). Currently affluent Indians need to earn three times the ex-factory cost of a Sports Utility Vehicle (SUV) to own it. Later on, to enjoy it, they need to earn about five times on ex-refinery price of petrol. In return they are being deprived of all government benefits and are subjected to constant tax scrutiny. Unfortunately, some of the high tax payers have even changed their residence / citizenship and many are actively considering it.

If we follow the thumb rules of ‘Arthashastra’, taxing individuals beyond 17% of their income hurts and it results in tax evasion and corruption. The higher limit of 25% was supposed to be adopted only for a short period during an emergency. In Singapore, the highest slab is 22% on income tax, and 7% on GST.

Any move to tax agriculture income will be highly political. The ruling government needs 2/3 majority to add agriculture taxation under the central government mandate as per the constitution. It can then bring it under the purview of Income Tax act. If somehow that magic happens, I suggest to limit tax free agriculture income at ?10 lakhs (1 million), all additional agriculture amount to be taxed at 5%. For the first 5 years, 100% of the collected agriculture tax will be given back to states to enhance their farm infrastructure, later the state allocation to be reduced to 75% and 50% after every 5 years. Farm capital goods and warehouses should be allowed to be depreciated at an accelerated pace to provide tax relief and promote agriculture investments. The net count of farmers generating above threshold income after considering depreciation benefit would be less than 50,000. Incidentally many high yield farmlands are owned by politicians, industrialists and bureaucrats, but they have never shared the secret of achieving such lucrative yields. Yearly there are already about 3000 tax returns with secondary tax free agriculture income above ?1 cr (10 million).

Currently top 5% income tax payers contribute more than 60% of the total income tax collection and 75% of them are from the salaried class. Additional increase of tax imposed on this class, in the form of painful sur-charges, has not impacted vote share of any party. Similar impact can be assumed in the case of taxing the population of a handful of affluent farmers. Indians have demonstrated that the popularity of leaders increases on hurting the rich. Examples are that of raising the highest income tax rate to 97.75% during Indira Gandhi’s quest to remove poverty (under Garibi hatao program) and the recent demonetization effort to seize black money.

Will we ever witness the re-release of real ‘Lagaan’???

Disclaimer: The graphical recreation of the characters and title of the article is an expression of respect to the movie 'Lagaan', which is owned by Amir Khan's production. This graphic can’t be used for any commercial purpose or to be used for any other causes. The views, thoughts, and opinions expressed in this post are solely those of the author. They do not purport to reflect the policy or position of RRD.?

Credit: Research supported by Madhav Goel