NEW DELHI India's finance minister Arun Jaitley said on Wednesday that the government has no plans to tax agricultural income, a day after a senior economic adviser touched a political nerve by proposing farmers pay income tax like people in cities.
Economist Bibek Debroy, a member of the Policy Commission that serves as the government's own think-tank, told a news conference on Tuesday that farmers should be liable to pay tax on their incomes at the same thresholds, while taking into account seasonal fluctuations over a three-year period.
Any move to tax farm income could provoke a political backlash in rural India after Prime Minister Modi promised to waive off bank loans to help small farmers whose livelihoods are hostage to the monsoon rains.
Income tax in India starts at 5 percent when earnings exceed 250,000 rupees ($3,900), climbing to a top rate of about 30 percent on incomes upward of 1 million rupees.
"The central government has no jurisdiction to impose tax on agricultural income," Jaitley said in a statement, noting that under the Indian constitution only states could tax farm income.
A senior aide to Modi also said the government had no plans to tax agricultural income, but did want to prevent misuse of the tax system by people falsely declaring earnings from other sources as farming income.
Analysts say taxing the agricultural income could reduce tax evasion though most of the farmers would remain outside the tax net due to their low income level.
The loophole in the tax system is often exploited by rich politicians and even Bollywood movie stars, who evade taxes by showing part of their income as farm income.
India's public finances are notoriously precarious, with the International Monetary Fund estimating that tax revenues are equivalent to just 17.7 percent of gross domestic product - low by comparison with other emerging markets.
Debroy's boss, Policy Commission Vice Chairman Arvind Panagariya, clarified that the views on taxing farm income were his personal views and not those of the commission.
(Reporting by Manoj Kumar; Editing by Simon Cameron-Moore)