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Taxation measures, impetus to labs among suggestions to finance ministry
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Tuesday, 17 January, 2017, 08 : 00 AM [IST]
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S Jindal
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With the Union Budget for 2017-18 round the corner, every sector has a wishlist, and the food processing sector is no different. It is aware that in order to revitalise the Indian economy, finance minister Arun Jaitley has his task cut out (and it won’t be easy to find solutions).
However, it expects that he will adopt a host of measures that will ensure growth in production, sustenance of the micro-, small and medium enterprise (MSME) sector, ease of doing business, lowering the tax burden, incentivising research, skill development, etc.
The following are the critical recommendations the food processing sector, which has taken into account the fact that the fiscal environment in the country is undergoing a rapid change, has made to the ministry.
Taxation measures to strengthen food processing
Under Section 32 of the Income Tax Act, accelerated depreciation of up to 100 per cent is allowed for various types of plantsand equipment, including energy-saving devices, renewable energy devices, water or air pollution control equipment, solid waste recycling and recovery systems, steel rollers used in flour mills and sugar works, computer and computer software, gas cylinders (including valves and regulators), glass melting furnaces, etc.
However, the plant and equipment used by the food processing industry is provided depreciation at the rate of 15 per cent only. This is too little, considering the excessive wear and tear of the equipment and the need to replace equipment with newer and better machines to increasethe processing capacity and improve the product quality. It is recommended that the rate of depreciation for plant and equipment used for food processing be increased from 15 per cent to at least 50 per cent, if not more. This will help to strengthen food processing and improve the financial viability of units.
Secondly, to help the existing units in adding new processing capacity and improve scale, it is recommended that the provision available under Section 80IB(11A) for new units in the areas of processing, preservation and packaging of fruits and vegetables, meat and meat products, poultry, marine and dairy products be extended to existing units also for expansion of capacity by at least 50 per cent. The scope of the scheme also needs to cover more segments of food processing and food products.
Providing impetus to R&D activities, testing laboratories and skill development
It is perceived that research is a critical factor in meeting global challenges and optimising the use of resources for their best application. International competition, rapidly-changing consumer expectations and stringent regulatory requirements are compelling the system to improve and innovate. Better product design, controlled processing, proficient handling, perfect quality and efficient delivery are the emerging benchmarks. Under these circumstances, we need a strong research and development (R&D) environment, more and more skilled manpower and accurate product analysis. This means we need to set up specialised research centres, a wider network of testing laboratories and trained manpower to handle and manage the same. A quantum jump is required in this direction, while much less is presently visible. Strengthening government institutions and motivating private research, laboratories and training centres is the need of the hour. A robust and sensitive fiscal policy is required to meet this huge challenge and the government has to take the initiative to include these measures in the Union Budget proposals.
Upgrading post-harvest infrastructure and exempting it from service tax
Post-harvest infrastructure is rather poor in the country, leading to excessive wastage of natural produce, thereby disrupting the farm economy. There is an urgent need to upgrade the infrastructure related to post-harvest handling, sorting, cleaning, packing, storage, minimal processing, collection centres, mandis, etc. A robust system will ensure that raw materials reach the processing units in fresh and sound condition.
Further, it is important that all services rendered during this phase of the food chain,including ripening, cleaning, sorting, grading, waxing, pre-cooling, packing, storage, minor processing, drying, thrashing, deshelling, loading/unloading, transportation, etc., are kept outside the ambit of service tax. This will economise these processes and also save critical time spent in completing tax procedures and fulfilling related formalities.
Incentivise development of indigenous food processing equipment
In the Union Budget 2014–15, Central Excise Duty was exempted on specifiedmachineries of the dairy sector and cold chain, while for some food processingequipment used for preparation of fruits, nuts, vegetables, meat and poultry was reducedfrom 10 per cent to six per cent.
This was a commendable step for the development of indigenous foodprocessing equipment, which is extremely important for rapid growth of processingin the country. However, it was limited in its scope and required to be adopted overthe entire processing chain handling and processing perishable agri produce. Indiaprocesses farm produce between two and eight per cent, as compared to much higher levels of 40to80 per cent achieved by many countries.
Encouraging entrepreneurship through simpler tax procedures to initiate business as well as to exit without restrictions and capital gains tax burden
Food processing industry in the country is mostly in the MSME sector, running as partnership firms. Entrepreneurs have severe apprehensions of taxation involvements on initiating the business and more so on exiting or restructuring the unit for diversification or under investment constraints.
Unfortunately, the Income Tax Act, under Section 45(4), levies capital gain tax on the assets of the firm when a partner leaves the firm or the assets are distributed between them for future growth or other prospects. The hurdle becomes more intense because the capital gain tax is levied on the free market price of the assets and entails heavy unbearable tax liability.
It is also ironical that an entrepreneur has to pay tax on the asset created by him through hard work and dedication. It would be prudent to resolve this problem as this sector provides entrepreneurship opportunities even in remote areas where other means of livelihood do not exist.
It is recommended that capital gain tax should not be charged when there is restructuring of a partnership firm or redistribution of its assets among its partners for diversification and growth. Appropriate amendment needs to be made in Section 45(4) read with Section 47 of the Income Tax Act in this regard to relieve the entrepreneur of this tax burden.
Support investment cost to this high-risk sector burdened with perishability,vulnerabilities of climate and year-round heavy finance blockage.Under Section 34AD of the Income Tax Act, investment-linked deduction of capital expenditure is available for cold chain facility, warehousing for storage of food grain,beekeeping and production of honey at an enhanced rate of 150 per cent. This incentive isextremely half-hearted and should be extended to all segments of food processingwhich use perishable agri raw materials.
Urgent programmes be undertaken at the government level to develop innovative, low-cost, environment-friendly and safe packaging materials for food products
The future of the food processing industry also depends upon the development of new innovative, low-cost, environment-friendly and safe packaging materials.
The country which leads the race in this context will excel and hold the market. India has a huge stake to worry about. It leads globally at the first, second or third position in most agri commodities, but our share in international trade in processed foods is miniscule.
The development of such packaging materials will require intense research and experimentation for which earmarking adequate budgetary allocations in setting up suitable research systems will be essential. The finance minister will hopefully take a call in this regard.
It will be relevant to mention here that the government decision to keep health and education out of the ambit of goods and service tax (GST) is welcome, but it is unfortunate that food has been put under GST, even though it deserves better treatment, being a life-sustaining input and a critical social need.
The fact that Central tax (i.e. Central Excise Duty) is currently zero per cent on 90 per cent of the food products, and state tax [i.e. value added tax (VAT)] was placed at a low rate of four per cent by the VAT Empowered Committee merits a special treatment for the food processing sector.
Taxing food products is highly regressive and the global practice is not to tax this sensitive sector or levy at a minimal three to six per cent. Food is normally not considered to be a revenue source. It is also important to mention that the policy framework to keep Central Excise Duty at zero per cent for food products has evolved over the last over three decades through multiple stages and with thorough analysis by senior officials and economists.
It is an optimum solution to save perishable natural produce, feed the country, enrich farm economy and compete globally. Violating this fundamental socio-economic framework under the argument of revenue generation is like turning the clock back. The nation may have to pay a heavy price for this incongruency.
It is in the larger interest of agriculture and consumer needs that food products prepared from perishable raw materials be kept out of the ambit of GST. The nation is already riled with losses worth a few lakh crore rupees annually, owing to wastage of natural produce, thereby crippling the farm economy and leading to higher consumer prices.
Somebody needs to take a call at this crucial junction. We look towards the finance minister with great expectations. Hope 2017 will be different from the past. It is time we take the leap forward and project India as the food bowl of the world.
[The author is president, All India Food Processors’ Association (AIFPA).]
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