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Finance ministry urged to give more impetus to food processing industry
Saturday, 07 January, 2017, 08 : 00 AM [IST]
Ashwani Maindola, New Delhi
In their proposals for the Budget for the financial year 2017-18, which has been advanced by the government of India to February 1, 2017, the industry bodies have urged the ministry of finance to make arrangements to give a further impetus to the food processing industry, which, according to it, has tremendous potential to become one of the leading sectors in the country but is marred by certain policy decisions on the taxation front.

According to the PHD Chamber, India’s food processing industry, which is still in its nascent stage and has a low penetration, needs a further push. It said that as much as 70 per cent of the current food spending by the Indian consumer is on agricultural products. Additionally, two-thirds of this spending is on primary and secondary processed products.

“However, the processed food industry in the country is heavily taxed by way of value-added tax (VAT), entry tax, octroi, etc., even though the Central government has either exempted these goods from excise duty or subjected them to a nominal excise duty of two per cent. The cumulative incidence of taxes, along with increased transportation and distribution costs, makes these processed food items, which form the daily food consumption basket of the consumer, more expensive,” it added.

The Chamber stated that over 74 per cent of the food processing industry was in the micro, small and medium enterprises (MSME) category, adding that any increase in the cost of manufacturing cannot be borne by these enterprises, hence the cost is passed on to the end consumer.

Also, the input costs of packaging materials have increased tremendously in the recent years. This, coupled with the high incidence of excise duty on packing materials such as printed laminates and PET jars, which currently attract 12.5 per cent excise duty, is posing an additional burden on the food processing industry.  

And as a result, it is not growing at the same pace as was witnessed in the previous years.      

It suggested in its proposal that in view of this the existing exemptions extended to the food processing industry (either in the form of nil rate of duty or two per cent duty) should be continued.

Further, the government may find it appropriate to provide some relief by reducing the excise duty on packaging materials used in the food industry - printed laminates (Chapter Heading 3920/3921/3922/3923) and PET jars (Chapter Heading 3923) from 12.5 per cent to six per cent.

The Chamber also urged the ministry to extend the concessional rate of excise duty on capital goods for the food processing industry vide notification number 12/2104 C E dated July11, 2014. Concessional rate of excise duty has been provided for processing/packaging machinery used in the manufacture of agricultural/apiary/horticultural/dairy/poultry/aquatic/marine produce and meat.

It stated, “While the food processing industry welcomes the above initiative, which will help reduce the capital cost, a large portion of the processed food industry, which deals with basic essential packaged foods for the common man, such as staples, biscuits and so on, are deprived of the benefit of concessional rate of excise duty on processing/packaging machinery. The organised packaged food processing industry procures substantial processing/packaging machinery, and this discrimination within the same industry is inequitable.  

It suggested that the concessional rate of excise duty on processing/packing machinery may be extended to the entire food processing industry instead of limiting the same to certain sectors within the industry.

PHD Chambers on Central excise levied on bakery products

Presently, Central excise is chargeable on bakery and confectionery items (Central Excise Tariff Headings 19051000 to 19059090, 18069010 to 18069090 and 17049010 to 17049090) sold in hotels. This forms a small portion of the hotels’ food and beverage revenue. Excise is not charged on any other food item. Due to this, hotels are subject to the cumbersome administrative formalities of Central excise without any significant contribution to the exchequer.
Central excise duty on confectionery industry

Organised confectionery is one of the largest categories in the processed foods sector, providing significant sustainable rural/semi-urban employment. Confectionery is basically made out of sugar, milk and milk products, glucose, etc., which are agricultural products.

The industry plays an important role in the economy of the country, especially the small scale industry, which supplies intermediary inputs like printed wrapping materials, PET jars and corrugated boxes. The transport sector is also immensely benefited in the transportation of the confectionery items throughout India. Since confectionery products are retailed through more than ten million retail outlets in the country, there are huge spin-off benefits to the transportation sector as well as opportunities for the self-employed, the service sector and MSMEs.

Sugar-boiled confectionery (falling under Chapter Heading 170490 of Central Excise Tariff) in India is defined by rigid price points, predominantly 50 paise and Re 1 per unit.

It is one of the most hygienic products intended for mass consumption, available at the lowest price point in the country. The industry, however, is under severe inflationary pressure, both in terms of cost of inputs as well as distribution costs.  

It suggested that some relief may be provided by way of reduction of the rate of Central excise duty from the existing six per cent to two per cent, in line with the rate of Central excise duty imposed on most other food products like soya milk drinks, preserved fruits and vegetables, milk-based beverages, muri (puffed rice), ice cream, mineral water, dried soups and broths, and so on.

Meanwhile, the Federation of Indian Chambers of Commerce and Industry (FICCI) suggested that service tax on processing of agriculture commodities that do not alter the primary nature of the agri produce should be exempted. It is recommended that the processing of whole pulses into split pulses should be covered under the negative list of service tax.

Also, on service tax on room rent and on sale of food and beverages, FICCI said that in the Finance Act, 2011, the scope of service tax was expanded to levy service tax on renting of rooms and food and beverages sales by air-conditioned restaurants having liquor licences (subsequently, the coverage was extended to all restaurants) despite the fact that in hotels, luxury tax is charged on renting of rooms and VAT is charged by all hotels and restaurants on the sale of food and beverages.

Whilst the current abatement in respect of service tax has been provided at 40 per cent for rooms and at 60 per cent for food and beverage, on the balance portion there is an element of double taxation – service tax and luxury tax in the case of rooms and service tax and VAT in the case of food and beverages.

On an average, the total tax outflow for the guest works out to more than 20 per cent. Consequently, this tax levy is a significant deterrent to the hospitality industry, which is already impacted adversely by the general slowdown of the global economy.

The levy of service tax on the renting of rooms and the sale of food and beverages should be discontinued to provide some relief to the industry.

On Central VAT (CENVAT) accumulation for metal cans supplied for the export of goods, FICCI stated that the metal container industry was suffering due to CENVAT accumulation on account of sales to merchant exporters who buy goods under Notification 43/2001, where no excise duty is charged to them.

Various food products like mango pulp, processed vegetables, coffee, etc., which are packed in tin containers, are exported by manufacturers, export houses, traders, merchant exporters, etc. These cans are supplied by the industry without paying excise duty under Notification 43/2001 dated 26/6/2001, as merchant exporters and their supporting manufacturers don’t want to pay excise duty and claim refund. The said notification stipulates the procurement of goods without payment of duty for the purpose of use in the manufacture or processing of export goods and their exportation out of India. For the can-making industry, this results into underutilisation of CENVAT credit.

“We suggest that such deemed export should be brought at par with physical export as in the latter case, the excise duty paid on packaging material is being refunded under Rule 18 of the Central Excise Rules, 2002. The above measure would help the industry to address the issue of accumulation of credit, which is causing huge cash flow problem to them,” it said.
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