Doubling of Farmers' Income

Formalization of rural & semi urban economy

While cash transactions have now been done away with in most cases, it is still allowed for payment to farmers for their agro-produce. When payment to farmers for almost all the Govt schemes, subsidies etc is done to bank account directly (DBT), why this practice of payment for farm produce by cash?

Well, I may not have proper understanding of perishable agro-produce market, where there may be some compulsion/conditions which might necessitate the payment by cash. But, at least in case of non-perishable agro-produce, there is not a single valid reason for necessary cash payment.

Well here is a brief about what am I suggesting:

Existing provision in the Income Tax Act u/s 40A (3): any expenditure in cash above Rs.10,000/- is not allowed as expenditure. So to that extent, taxable income of the business increases. Impact of this provision is that, no business normally makes any payment above Rs.10,000/- in cash. But there are a few exceptions to this provision in Rule 6DD of the Income Tax Rules. Under clause (e) of the said rule, any payment for purchase of agriculture produce from cultivator/grower can be made by way of cash even above Rs.10,000/-.

Now, what I am suggesting is to delete this clause or at least let it be there only for perishable farm produce. So any cash payment above Rs.10,000/- for non-perishable farm produce would be disallowed u/s 40A(3).

Benefits -

Ø  Automatically, acceptance of e-payment would increase resulting in acceptance of e-NAM

Ø  On an average 2%-20% jump in eventual realization of farmers

·           Bill to traders by commission agents at 100% and payment to farmers @97/94 (eg. grade changes where auction is done grade wise instead of each lot separately)

·              Break on practice of cash discount which might range from 2% to 5%
·     Illegal practice of deducting commission under various names like dalali, mamul, batav etc would stop which may be as high as 12% in some cases.

Ø  If Govt has eventual target of realization of farmers to be at least 50% above their cost then an increase of 2-20% realization would mean around 10%-50% increase in profitability of farmers.

Ø  Creation of trail for all the chain of transactions

Ø  Stopping of pilferage of various Govt levies like cess and supervision fees at different levels as clear audit trail available.

Ø  Illegal intermediaries will cease to exist. Reducing no. of intermediaries would itself either increase farmers’ realizations or reduce consumers’ cost.

Ø  Commission paid to drivers of auto/tempo would go away, again impacting farmers’ realizations positively.

Ø  As every payment to farmers has to be made via bank, every farmer would be traceable. This would also put a lid on physical pilferage of farm produce either of farmer or trader. This is so because the thief will also have to take payment through Aadhar linked banking channel.

Ø  This would also have positive impact on farmers income in two ways

·               They would be realizing money for actual quantity produced.

·        If this stops/lowers loss, due to pilferage, of traders, they would be in a position to offer higher price to farmers without compromising on their margins.

Ø  Availability of accurate data for statistical research and improved decision making which will help all stake holders from Government to farmers. Following are a few examples of advantages of availability of accurate and reliable production data:

·               Just imagine impact on schemes like Bhavantar Yojana of the state of MP

·               Loan recovery by banks, Loan waivers, Crop insurance & other schemes

·                Keep a tab on bogus agricultural income claims for income tax benefits

·             Accurate data about production of various agro-commodities would make it easier to take related policy decisions.

Ø  Since all the purchases of traders from farmers would have to be done by payment via bank, the practice prevalent to whatever extent, of showing excess purchase cost of farm produce by inflating cash bills will stop and so the actual profit margins would be visible increasing transparency in the trade.

Ø  This would also push traders to make all other expenses, above allowed cash expense threshold (10,000), via bank so as to avoid excess income tax payment. (As of now, as cost of cash purchases of farm produce can be inflated, tax liability can be planned). This will bring an entire section of economy related to farm trade in banking channel.

Ø  It would be not possible for traders, stockists to stock up any commodity beyond permissible limit as any such stock would have to be on record.

Ø  Significant push to digital economy and consequently benefits of digital economy. And we are not even discussing benefits of money reaching directly to the bank account of farmers like increased savings & consequently some positive impact on reducing suicide attempts of farmers.

Ø  And most important, all this would help in reducing the gap between the price farmers receive and end consumers pay (Anti-inflationary).

The whole chain has some or the other benefits of this change. The biggest beneficiaries as explained above are of course government and farmers. But even law abiding traders would benefit by the way of less handling of cash.

The biggest negative impact would be on intermediaries who used to exploit this loophole for not only illegal increase in margin by cheating but also illegal tax planning. This would also eliminate many intermediaries who thrived purely on illegal margins. Many employees, service providers and vendors of intermediaries are used to take payment in cash and remain out of formal economy. All these people will be forced to be part of formal economy. A big portion of black money generation would come to halt.

These current malpractices or say state of affairs is very well known to local statutory authorities. What this means is that they normally, not necessarily, use it to extract small amounts here and there on a regular basis. This formalization would also stop these corruption practices at grass root level further improving the efficiency and transparency of the trade.

In fact, I believe, after demonetization, this would be biggest push towards formalization of rural, semi urban economy of India. Even at the most conservative estimate it would be at least 3% to 5% of GDP.

As the economy formalizes, less black money will be left with people to invest/take care of. It will eventually lower demand for land & gold. That will take care of two of the major problems of the country

1)      Lower gold import reducing current account gap

2)     Lower land prices will attract more investment in other agriculture related infrastructure pushing modernization of agriculture.

This can certainly be implemented with immediate effect. Govt will have to simply amend Rule 6DD (e) of the Income Tax Rules, 1962.

What this means is that any cash payment to farmer above Rs.10,000/- would be disallowed as business expenditure u/s 40A(3) of the Income Tax Act. So no trader would be able to make payment of more than Rs.10,000/- in cash per farmer.

This also means that farmers can still get up to Rs.10,000/- in cash, if they want, from traders for any incidental expenses they incur to bring their produce to market like labour & freight. And any amount above that would be received in bank account. With all the advancement in digital payment, it can be done in minutes.

I believe many traders used this loophole for making payments to farmers during early period after demonetization and caused one of the biggest leakages on the success of that big policy initiative of the Government.