Agricultural Taxation and

Subsidies
By: Ayush Mishra
PhD 1st year Student
Department of Extension Education
 Agricultural Tax
• Tax is a certain amount which have to be paid to the Government by the
individuals. Tax paid according to some percentage on the income value
of the individual.
• The Agricultural Tax means the tax paid according to the Agricultural
income.
• 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.
• Access levied on acreage of crops or based on their market value or
livestock or even fisheries can also be termed as a direct tax.
 Need for Agriculture Taxation
• 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.
 Contd.
• 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.
 Arguments in Favour of Agricultural Income Tax
1. Increase in prices of agricultural goods and services.
2. Concealment of Income.
3. Increase in government revenue
4. Increase in tax base
5. Better utilization of land resources
 Arguments in Opposition of Agricultural Income Tax
1. Assessment can be a tedious job
2. Not suitable for subsistence farming
3. Complicated taxation system
4. Farmers will find it burdensome
5. Will reduce employment
6. Reduction in cropping area
 Agricultural Subsidies
• Subsidies are just the opposite of taxes. Through taxes the government
takes away money from people, subsidies transfer money from the
government to the people.
• An agricultural subsidy (also called an agricultural incentive), is a
government incentive paid to agribusinesses, agricultural organizations
and farms to supplement their income, manage the supply of
agricultural commodities, and influence the cost and supply of such
commodities. Examples of such commodities include: Cereals, Pulses,
orchards, greenhouses etc.
 Need for Agricultural Subsidies
• For a developing country like India where agricultural employees around
half of the working population, the reasons for agricultural subsidies can
be easily understood. A vast majority of farmers have marginal to small
landholdings and farmers are close to the subsistence level of living, the
subsidies seek to help them carry out their production and consumption
activities in a better way.
• In order to increase productivity, subsidies may be given on inputs, such
as seeds, fertilizers and irrigation, as a result of which they become
cheap for the farmer.
 Contd.
• For introduction of improved farming inputs and technology the
government may provide subsidized farming machinery (like harvester,
tractor, irrigation devices) and High Yielding Variety (HYV) seeds.
• In order to promote the production of certain crops, price and input
subsidies may be granted. Subsidies can be in the form of: i) cheaper
inputs, ii) cheaper transportation facilities for marketing of the harvest
iii) storage facilities, and iv) higher procurement prices offered by the
authorities than the current market price.
• Subsidies can be granted to the farmers to produce for exports. This type
of subsidies helps the farmers in becoming more competitive in the
global market and in gaining a larger share of the global demand.
 Types of Agricultural Subsidies
1. Input Subsidy
2. Price Subsidy
3. Infrastructure Subsidy
4. Export Subsidy
 1) Input Subsidy
• Subsidies can be granted through distribution of inputs at prices that are
less than the standard market price for these inputs. The magnitude of
subsidies will therefore be equal to the difference between the two
prices for per unit of input distributed. Naturally several varieties of
subsidies can be named in this category.
• Subsidies on fertilizers, seeds, power, irrigation and credits come under
input subsidies.
 Fertilizer Subsidy
• Distribution of cheap chemical or non-chemical fertilizers among the
farmers. It amounts to the difference between price paid to
manufacturer of fertilizer (domestic or foreign) and price received from
farmers.
• This subsidy ensures: i) cheap inputs to farmers, ii) reasonable returns to
manufacturer, iii) stability in fertilizer prices, and iv) availability of
fertilizers to farmers.
• In some cases this kind of subsidies are granted through lifting the tariff
on the import of fertilizers, which otherwise would have been imposed.
 Irrigation Subsidy
• Subsidies to the farmers which the government bears on account of
providing proper irrigation facilities. Irrigation subsidy is the difference
between operating and maintenance cost of irrigation infrastructure in
the state and irrigation charges recovered from farmers.
• This may work through provision of public goods such as canals, dams
which the government constructs and charges low prices or no prices at
all for their use from the farmers. It may be through cheap private
irrigation equipment such as pump sets.
 Power Subsidy
• The electricity subsidies which implies that the government
charges low rates for the electricity supplied to the farmers.
• Power is primarily used by the farmers for irrigation purposes.
It is the difference between the cost of generating and
distributing electricity to farmers and price received from
farmers.
• Power subsidy acts as an incentive to farmers to invest in
pump sets, bore-wells, etc.
 Seed Subsidies
• High yielding seeds can be provided by the government at low
prices.
• The research and development activities needed to produce
such productive seeds are also undertaken by the government,
the expenditure on these is a sort of subsidy granted to the
farmers.
 Credit Subsidy
• It is the difference between interest charged from farmers, and actual
cost of providing credit, plus other costs such as write-offs on bad loans.
Availability of credit is a major problem for poor farmers. They cannot
approach the credit market because they do not have the collateral
needed for loans. They have to depend on the local money lenders who
take advantage of the helplessness of the poor farmers the lenders
charge exorbitantly high rates of interest.
• To tackle these problems the government can provide: (1) more banking
operations in rural areas which will advance agricultural loans, and (2)
the interest rates can be maintained low through subsidization schemes,
and (3) the terms of credit (such as collateral requirements) can be
relaxed for the poor.
 2) Price Subsidy
• Price Subsidy It is the difference between the price of food
grains at which government/co operatives procures food grains
from farmers, and the price at which government /
cooperatives sells to traders. The market price may be so low
that the farmers will have to bear losses instead of making
profits. In such a case the government may promise to buy the
crop from the farmers at a price which is higher than the
market price. The difference between the two prices is the per
unit subsidy granted to the farmers by the government.
 Contd.
• The price at which the government buys crops from the
farmers is called the procurement price.
• Such procurement by the government also has a long run
impact. It encourages the farmers to grow crops which are
regularly procured.
• In India continuous procurements of food grains at MSP by the
government has benefited the farmers.
 3) Infrastructural Subsidy
• Good roads, storage facilities, power, information about the market,
transportation to the ports, etc., are vital for carrying out production
and sale operations. These facilities are in the domain of public goods,
the costs of which are huge and whose benefits accrue to all the
cultivators in an area.
• No individual farmer will come forward to provide these facilities
because of their bulkiness and inherent problems related to revenue
collections (no one can be excluded from its benefit on the ground of
nonpayment). Therefore the government takes the responsibility of
providing these and given the condition of Indian farmers a lower price
can be charged from the poorer farmers.
 4) Export Subsidies
• This type of subsidy is not different from others. But its
purpose is special. When a farmer or exporter sells agricultural
products in foreign market he earns money for himself, as well
as foreign exchange for the country. Therefore, agricultural
exports are generally encouraged as long as these do not harm
the domestic economy. Subsides provided to encourage
exports are referred as export subsides.
THANK YOU