In India, power to tax agricultural income lies with the state governments. For a variety of reasons the state governments have been reluctant to introduce a full-fledged agricultural income tax, thus introducing a basic inequality in the operation of the tax system.

Several arguments have been advanced against introducing agricultural income tax and the most prominent among them is that such a tax will be difficult to implement since farmers do not maintain standard accounts of their costs and returns. In actual fact a major reason inhibiting the state governments is their fear of antagonizing the farm lobby.

It is argued that the farm sector suffers from adverse terms of trade and this is also cited as a reason for not taxing the farm sector. The absence of this tax result in inequity in the income tax structure as a whole. Within the agriculture sector the non-introduction of this tax favors the rich agriculturists against the poor.

The growth of food production since independence has only been just sufficient to meet the needs of a growing population and in this context it may not be wise to impose a heavy tax burden on the sector, which may affect food production adversely. It is also possible that revenue realization from an agricultural income tax may be inelastic, considering the lower rate of growth of this sector compared to other sectors.

With the rapid rate of growth of population and the consequent fragmentation of land holdings the economic surplus that originates in this sector is not likely to expand fast, resulting in low buoyancy of the agricultural income tax. But indirect resource mobilization of this sector is possible in a variety of ways provided the political will exists.

Several inputs such as water, electricity, and fertilizers are provided to the farmers at highly subsidized rates. The subsidy on these accounts largely accrues to the big farmers as compared to the small and marginal ones. Given this it may be more feasible to mobilize resources from the farmers through a gradual reduction in subsidies rather than by introducing a full fledged agricultural income tax.

India may have to wait several more years before it is able to integrate taxation of agricultural income with general income tax. Meanwhile it would not be prudent to exclude the farm sector from the process of overall resource mobilization.