Under the Constitution, agricultural income can be taxed by the State and not by the Centre. However, in the case of tea, the Centre contended that there was a substantial manufacturing process involved in the production of tea; hence, income from tea could not be classified as fully agricultural income and that a part of the income had to be taxed as central income.
Income Tax Act:
- Under Sec 8 of the I-T Act, which stated that due to the manufacturing activity involved, 40% of the income would be taxed by the Centre.
- In 2002, the Centre then followed the same logic and introduced Sec 7 & 7B for rubber and coffee respectively. It decided to partially tax the agricultural income from both commodities, claiming there was manufacturing activity involved.
- Where coffee is cured or hulled before being sold, manufacturing activity was involved and hence 25% of the income was to be taxed by the Centre.
- Curing is a process by which raw coffee is converted to green beans ready for roasting. Substantial machinery and effort is involved but the actual cost of curing works out to about ₹2 per kg for a product worth about ₹200 per kg, or 1%. The Centre thus claimed the right to tax 25% of the agricultural income from coffee.