Wealth Tax: So, when is land agricultural?

Finance Minister P Chidambaram may not have intended to tax farm lands under the Wealth Tax Act, 1957, but a small change proposed in the definition of urban land under this statute in Budget 2013-14 led to a storm of protests early this week. This forced the finance minister to make a fresh amendment to the law to ensure agricultural land remained out of the tax net before the Budget could be passed by the Lok Sabha.

Earlier, leaders of Chidambaram's own party in Haryana, as well as Shiromani Akali Dal leaders in Punjab, were up in arms, with the latter planning major protest rallies and agitation against what they saw as the Budget's move to impose wealth tax on agricultural land. So, what was the fuss all about?

A Business Standard analysis of the sequence of events and the status of the laws pertaining to wealth tax for urban and agricultural land shows a change in the definition of urban land in the Wealth Tax Act in the proposed Finance Bill 2013 may have been the culprit. Those who drafted the provisions for changing the definition for urban land may not have realised that the specific exemption for agricultural land for wealth tax purposes was not mentioned while bringing about the change.

According to section 2, clause EA of the Wealth Tax Act, 1957, urban land is defined as (i) land in any area within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee or by any other name) or a cantonment board, which has a population of not less than 10,000, according to the last preceding census, the relevant figures of which have been published before the valuation date; (ii) land in any area within such distance, not being more than eight kilometres from the local limits of the municipality or cantonment board referred to in sub-clause (i) as the central government may, having regard to the extent of, and scope for, urbanisation of that area and other relevant considerations.

In other words, the Act had no provision for population-based exclusion criteria in the definition of urban land within eight kilometres from local limits of a municipality or a cantonment board. Irrespective of the population, land within eight kilometres of the municipalities and cantonment boards would qualify as urban land. This definition did not provide for any exemption to agricultural land, as wealth tax was understood to be applicable only on urban land.

What did Budget 2013-14 propose?
A problem arose when the Budget proposed to replace the definition of urban land in Wealth Tax Act, 1957, to include land (i) in any area within the jurisdiction of a municipality, whether known as a municipality, municipal corporation, notified committee, town area committee, town committee or by any other name, or a cantonment board, which has a population of not less than 10,000 (ii) land in any area within the distance measured aerially - (1) not more than two kilometers from the local limits of any municipality or cantonment board referred to in sub-clause (i), which has a population of more than 10,000, but not exceeding 100,000; (2) not more than six kilometers from the local limits of any municipality or cantonment board, which has a population of more than 100,000, but not exceeding a million; (3) not more than eight kilometers from the local limits of any municipality or cantonment board, which has a population of more than a million.

Tax experts said the new definition of urban land in the Budget introduced the population criteria while defining urban land and split this into three parts. As a result, some plots earlier treated as agricultural land now became urban land, under the proposed provisions of the Wealth Tax Act.

What was the fallout?
The immediate fallout was all types of land that came under the new definition of urban land suddenly began attracting wealth tax. Though agricultural land was granted exemption in other provisions of the wealth tax law, no specific exemption was granted in the new definition of urban land. What made matters worse was the definition of urban land was actually made more broad-based.

Where did the protests start?
Experts said the protests were started by some farmers in Punjab, largely around the Jalandhar and Ludhiana towns, as agricultural land around these areas was highly valued. Also, the landholding in Punjab and Haryana is among the highest in the country.

Therefore, farmers in these regions were directly hit, as farmland within the vicinity of municipalities were suddenly considered to be urban land, according to the new definition, and started receiving tax notices from the Department of Income Tax, the administering authority for wealth tax. According to Ramesh Chand, director of National Centre for Agriculture Economics and Policy Research, in 2001, the average farm size in the country was 1.33 hectares; in Punjab, it was 4.03 hectares and in Haryana, it was 2.32 hectares.

What triggered it all?
The protests were triggered by tax certificates issued to a few big farmers in Punjab and Haryana. While the amendment in the definition of urban land was applicable for the entire country, the protests originated in Punjab, as tax notices were first issued here. A few experts said farmers in Punjab were more well-connected and aware of their rights and , therefore, the protests flared up.

The compromise: Now, a specific amendment has been introduced in the definition of urban land in Wealth Tax Act, 1957. This keeps land classified as agricultural land in government records and land used for agricultural purposes out of the purview of the definition of urban land, while calculating wealth tax. "The controversy because of the definition of urban land seems to get clear, as agricultural land may not form part of urban land," Divya Baweja, senior director of Deloitte Touche Tohmatsu India Private Ltd told Business Standard.