CHAPTER VII INTER STATE COMPARISON OF REVENUE FROM TAXES ON INCOME

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1 CHAPTER VII INTER STATE COMPARISON OF REVENUE FROM TAXES ON INCOME In this chapter we discuss the growth of total revenue from taxes on income. We also examine the growth of revenue from agricultural income tax and profession tax. A.TAXES ON INCOME Taxes on income are the most important source of revenue because they have the potential for increasing the yield of the tax system. Also, they are helpful to achieve a system of taxation that satisfies the demand for equity and social justice. In general, developed countries collect more revenue than the developing countries from taxes on income. Personal Income tax is levied by the Central Government on the income of the individual or family. Under taxes on income, agricultural income tax and profession tax are levied by the state. GROWTH TRAND OF REVENUE FROM TAXES ON INCOME Table VII 1 and Table VII 2 show the growth of revenue from taxes on income at current price and constant prices. The total revenue and per capita revenue from taxes on income have increased between and in the states of Assam, Andhra Pradesh, Gujarat, Karnataka, Maharashtra and West Bengal. In Kerala and Tamil Nadu, it decreased. In real terms also the same trends are observed.

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4 210 The rate of growth of revenue derived from taxes on income varied from state to state. It either increased or decreased among the states. In Bihar, Haryana, Orissa, Punjab and Rajasthan, there was no revenue from taxes on income during the study period. Maharashtra alone continues to occupy the top most place from to In Maharashtra, the total revenue increased by more than 15 times and the per capita revenue went up by more than 9 times during the period under our consideration. The contribution of the taxes on income to total revenue (See Appendix Table A-46) was 1.1% in Karnataka and West Bengal and 2.4% in Maharashtra in In the other states, the contribution was either nil or too negligible. And so the taxes on income are very meager sources of revenue for the states. Taxes on income comprises agricultural income tax and taxes on profession, Trade, Calling and Employment. B. AGRICULTURAL INCOME TAX Agricultural income tax is levied on the income from Agriculture. At present agriculture is subjected to two direct taxes and they are Agricultural Income tax and Land Tax. They are levied by the state governments. Bihar was the first state in India to levy a tax on agricultural income. 1 The yield from this tax was small and inelastic. This tax is levied in the states such as Bihar, Assam, Orissa, West Bengal, Rajasthan, Tamil Nadu and Uttar Pradesh. In Bihar the tax was levied in 1938 followed by Assam in West Bengal introduced this tax in 1944 and it was imposed in Tamil

5 Nadu in Section 2 of the Indian Income Tax Act 1922, defines Agricultural Income as follows: Any rent or revenue derived from land which is used for agricultural purposes and is either assessed to land revenue in the taxable territories or subject to a local rate assessed and collected by officers of the Government. 3 Many writers have argued that agriculture is under taxed. Following arguments have been put forward to support the view that agriculture is under taxed. a. Despite a rise in agriculture incomes, income to the states from Land Revenue and agricultural income tax has remained almost stagnant. b. Agricultural sector has been a major beneficiary of expenditure under the Plans. It has been subsidized through below cost pricing of water, power fertilizers etc. c. There has been a considerable improvement in productivity of wheat, rice and cash crops. d. Inequalities in agricultural sector have increased. But the other economists disagree with the view that agriculture is under taxed. Their arguments are as follows: a. The cost of production in agriculture has been increasing as land prices have shot up and labour has to be paid minimum wages. b. Since the production is high, the profit of the farmers is reduced.

6 212 c. More even distribution of income and property due to land ceiling legislation and rising incidence of indirect taxes on agricultural income earners has affected the capacity of farmers to pay taxes. d. The absence of reliable data, low level of incomes and high cost of assessment and the state governments fear of losing Assembly and Parliamentary elections are the difficulties in taxing agriculture. In Uttar Pradesh, the administration of the agricultural income tax is entrusted to the district revenue officers. Other states have a separate agricultural income tax department. The administrative provisions regarding submission of returns, assessment, appeal or revision, etc., are more or less similar in all the states. recommended. 4 Regarding the levy of taxes on Agriculture the K.N.Raj Committee i. A progressive Agricultural Holding Tax should be imposed on agriculturists who have no other assessable income. ii. In the case of assesses having non-agricultural taxable income, income from agriculture should be included in the total income. iii. Income from livestock, fisheries, poultry, dairy farming etc are subject to tax. iv. Capital gains tax on transfer of agricultural lands be imposed. GROWTH TREND OF REVENUE FROM AGRICULTURAL INCOME TAX AT CURRENT PRICES The growth of revenue from agricultural income tax at current prices is provided by the Table VII 3.

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8 214 From Table VII 3, we could infer that the total and per capita revenue from agricultural income tax had decreased in Assam, Karnataka, Kerala, Tamil Nadu and West Bengal during the period of our analysis. In other states, there was no agricultural income tax. The meager revenue and the growing cost of collection compelled some states to abandon this tax. Even in the states where agricultural income tax is in operation, only in Assam, the per capita revenue is relatively higher than in other states. Thus it is quite understandable that the revenue derived from this source is very negligible. The reasons for low income are difficulties in determining farm income, non-availability of records with farmers, wide fluctuations in output and prices causing fluctuations in farm income, prevalence of different systems of land holdings of tenancies and the heavy cost of collection. According to Prof. Lakdawala, Agricultural income tax is characterised by great confusion, inequity and poor revenue performance. 5 Further it is argued that due to the lowering of ceilings on land, it would be futile to expect any sizeable increase in its yield in the future, particularly in the long run after the present day larger holdings get divided and sub-divided through inheritance. C. TAXES ON PROFESSION, TRADES, CALLINGS AND EMPLOYMENT Before Independence, no state levied tax on trade, profession, calling and employment. But a local tax on these bases was levied in a few provinces under Government of India Act, After Independence, the Constitution provides for the levy of this tax. The profession tax figures in the

9 entry of the States List and Article 267 of the Constitution assures that its levy shall not be invalid on the ground that it relates to a tax on income. In fact, it is 215 a tax on all professions, all employment and all trades. As professional tax is a flat rate within a tax class, the burden of the tax falls more heavily upon the low income earners than upon the rich. So, it is unfair and hits the lower middle class hardly. It is unduly favourable to the rich as it exempts men with unearned income. Though, the revenue from this source has increased more than ten times, during the last twenty years, yet it can not be regarded as a very resourceful means to state treasury. 6 The Taxation Enquiry Commission, , has recommended that the profession tax should be reserved for the benefit of local bodies. 7 It should be assessed on the basis of income. Therefore the assesses are divided into a few classes on the basis of income and the maximum tax payable by each class is fixed on a progressive scale by the state government. GROWTH TREND OF REVENUE FROM PROFESSION TAX AT CURRENT PRICES The growth of revenue from profession tax at current prices is revealed by the Table VII 4. From Table VII 4, we can know that only in seven states, Andhra Pradesh, Assam, Gujarat, Karnataka, MadhyaPradesh, Maharashtra and West Bengal the revenue from profession tax accrues to the state governments and the total as well as per capita revenue from this source had

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11 increased sharply at current prices. In AndhraPradesh, there was no revenue from this head in because profession tax came in force in Andhra 217 Pradesh since only. In Bihar and Uttar Pradesh, the flow of revenue is not steady and continuous. The revenue from professional tax does not accrue to state governments in Haryana, Kerala, Orissa, Punjab, Rajasthan and TamilNadu. In these states, the entire revenue goes to the local bodies. This tax is a better source of income than agricultural income tax as its contribution to total taxes on income is higher. CONCLUSIONS 1. The Total and Per capita revenue from taxes on income at current and constant prices have increased in Assam, AndhraPradesh, Gujarat, Karnataka, Maharashtra and WestBengal. However, the revenue has grown continuously in Karnataka and Maharashtra only. In the other four states, it moves in cyclical form. Taxes on income is not an important source of revenue to the states since it provides less than 2% of total tax revenue in the five states and 3% in Maharashtra. 2. The total and Per capita revenue from agricultural income tax at current prices have decreased in Assam, Kerala, Karnataka, Tamil Nadu and West Bengal in our study period. In these states, it provides meager revenue. In other states, there was no agricultural income tax. Difficulties in determining farm income, absence of records with farmers, fluctuations in output and prices, different systems of land holdings and heavy cost of collection are the reasons for low income of agricultural income tax

12 The total and per capita revenue from professional tax have increased at current prices in the seven states, Andhra Pradesh, Assam, Gujarat, Karnataka Madhya Pradesh, Maharashtra and West Bengal where the revenue from this tax accrues to the state governments. Profession tax is a better source of revenue to these states as its contribution to total taxes on income is higher.

13 REFERENCES 1. Government of India: Report of the Taxation Enquiry Commission, , Volume III, P Government of Kerala: Report of the Taxation Enquiry Commission, 1969, P Ibid., P S.K. Singh: Public Finance in Developed and Developing Countries (S.Chand & Co, Ltd., New Delhi), 1982, P D.T. Lakdawala: Mobilisation of States Revenue (University of Madras, Madras), 1972, P Government of India: Report of the Taxation Enquiry Commission, , Volume III, P Ibid., P