UPASI

We herewith submit the Pre-Budget Memorandum relating to the Plantation Sector for incorporation of our suggestions in the Union Budget 2007-08.

As are you are well aware, the plantation sector in South India has passed through one of the worst crisis in the last five years. Though the prices with respect to rubber and coffee has improved, the situation with respect to tea sector continues to remain grim. The unprecedented crisis that engulfed the plantation sector had affected the livelihood of thousands of growers and lakhs of workers. At this difficult juncture in the history of plantation industry it is of utmost importance that the Union Government, in its coming Budget extends all plausible assistance to this ailing agro-industry.

Proposals at a Glance:

• The subsidy under Special Purpose Tea Fund (SPTF) be enhanced to 40% as originally envisaged, specially for South India.

• Inclusion of Orthodox Production Subsidy Scheme under the ambit of Section 10(30) of the Income Tax Act, 1961 so that the orthodox subsidy from Tea Board is not included as a part of total income.

• Coffee Development Account Scheme, 2004 and Rubber Development Account Scheme, 2004 be made operational.

• Exempt plantation companies from the purview of Sec tion 115 JB of the Income Tax Act.

• Plantation sector be excluded from the ambit of cash withdrawal tax.

• Clarification be issued stating that 2% Educational Cess is not applicable on Tea Cess, since Tea Cess is not levied by the Department of Excise/Customs.

• Issuance of a Notification exempting auctioneers’ services from service tax for sale of agricultural produce such as tea.

• As the Fringe Benefit Tax (FBT) introduced in the last Union Budget has unjustifiably increased the corporate tax burden besides causing considerable confusion, it is submitted that FBT be abolished for the plantation sector.

• The time limit for the concessional import tariff be extended for five more years from May 2007 and also include machineries such as vending machine for tea and coffee, Chain Saws for shade lopping, cutting and felling, Versatile Hedge trimmers for bush skiffing in tea, Earth Augers / Soil Augers for making planting pits and fencing, Telescopic Pruners for shade lopping, Coffee Espresso Machines, Electrical Home Coffee Brewing Machine and Mechanical Driers for drying coffee.

• Uniformity in Value Added Tax (VAT) rate by fixing 1% for teas sold through South Indian auction centres and abolition of Central Sales Tax.

We humbly request you, Sir, to consider the submissions made by us.

Respectfully we remain.

Yours faithfully,

FOR THE PLANTATION INDUSTRY

1. PLANTATION SECTOR AND NATIONAL ECONOMY – STYLIZED FACTS

The plantation sector in India plays an integral role in the economy of three southern States. Kerala [Rubber, Coffee, Spices], Tamil Nadu [Tea], Karnataka [Coffee] together account for almost a quarter of total tea output and almost the entire production of coffee, Natural Rubber, Cardamom and Spices. In tea, though South India accounts for only less than one fourth of country’s tea production, its contribution in the export front is nearly 50 per cent.

Other statistics are also equally impressive. Of around 13.4 lakh growers and 22.8 lakh labourers, who are involved in raising plantations in India; nearly 87 per cent of growers and 58 per cent of labourers are from South India. To be specific, about 11.7 lakh growers – most of them small and tiny – cultivate the plantation crops in South India in 10.4 lakh hectares providing round the year permanent employment to nearly 12.6 lakh labourers. These statistics corroborate the sector’s catalytic role in the developmental process of the under-developed regions in the country - where these crops are invariably grown.

The total area under plantation crops is estimated to be around 15.5 lakh hectares, which is marginally less than 1 per cent of total cropped area in the country. But the striking fact is the importance of plantations in South India, as it accounts for 67 per cent of the total area under plantations.

Total value of the plantation commodities in 2005-06 is estimated at Rs. 14,100 crores, which account for nearly 2 per cent of the India’s total agricultural GDP, while the export realization is estimated at Rs.3,750 crores accounting for nearly 9 per cent of the total agricultural and allied product exports. The share of South India in the total value is estimated at 64 per cent whereas its share in the export value is 72 per cent.

The relative importance of the plantation sector vis-ŕ-vis other sub-sectors in agriculture is evident from the fact that its share in agricultural GDP is more than two times of the share in gross cropped area. A relatively higher value of output vis-ŕ-vis other sub-sectors in agriculture even during a phase of depressed market conditions underline the socio-economic dimensions of this sub-sector.

The current impasse in the plantation sector due to uncertainty in prices and steady increase in cost of inputs will be more serious in the case of regional economy of South India as more than 67.4 per cent of the total area under the crops is located in this region and almost 87 per cent of the total number of producing units are in South India. This exclusivity, viz. dominance of plantation sector in South India makes it more vulnerable to the market uncertainties.

Accordingly, it qualifies for a renewed attention in the budget making exercise as the livelihood of 13.4 lakh growers and 22.8 lakh labour are dependant on this sector.

PRE-BUDGET PROPOSALS

1. SPECIAL PURPOSE TEA FUND (SPTF)

One of the important programmes conceived by the Government for the ailing tea plantations in the country is the massive replantation and rejuvenation programme under the SPTF. The objective of the programme is to address the issue of ageing tea bushes which has resulted in reduction in average yield per hectare of Indian tea. The programme is expected to revive the fortunes of the tea industry by increasing the yield levels and improving the quality, thereby enabling India to re-capture the competitive edge in the market place.

As per the estimate of UPASI Tea Research Foundation, the cost of replanting and its maintenance in the first couple of years under South Indian conditions could range from Rs 2.80 lakh to Rs 3.06 lakh, depending upon labour wages in the respective States, while the cost of rejuvenation pruning of the fields with 25% vacancy in South India ranges from Rs 0.75 lakh to Rs 0.82 lakh per hectare. Not only the cost involved is huge but the pay back period of the former will extend up to the twelfth year while that of the latter, it may take three years. Given the magnitude of the cost involved and also the resultant crop loss to the tea plantations in the initial phases of the programme, it may not be worthwhile if there is no adequate incentive to the growers by way of financial support.

One of the significant content of the SPTF scheme initially, was a Government subsidy of 40% for those who opt for the scheme. However, the subsidy of 40% was pruned down to 25%. It may be noted that at present 25% subsidy is available under the Tea Plantation Development Scheme of the Tea Board for which there are not many takers as it is not an economically viable proposition and that is why an enhancement of subsidy was contemplated.

Given the above facts, we request to kindly consider revising the subsidy to 40% under the SPTF as originally envisaged especially for South India so that the tea plantations could benefit from the programme.

As you are aware the South Indian Tea sector has been incurring losses for the past six years continuously and is unable to generate the funds for investments that are essential to make it competitive with the other global producers who are able to produce better quality tea at lower cost. This is mainly because they have younger plantations of high yielding clones and modern factories coupled with the added advantage of pest and disease free fields due to the geographical location. Therefore, it is essential to support the Tea Producers with a substantial amount of the capital required as it takes more than five years for the plants to reach economic viability.

2. INCLUSION OF ORTHODOX PRODUCTION SUBSIDY SCHEME WITHIN THE AMBIT OF SECTION 10(30)

In computing total income under the Income Tax Act, 1961 of an assessee who carries on the business of growing and manufacturing tea, in India, the amount of any subsidy received from or through the Tea Board under the Scheme for Replantation or Replacement of tea bushes or for Rejuvenation or Consolidation of areas used for cultivation of tea is not included as part of total income as per the provision of Section 10(30) of the said Act.

To encourage production and meeting the export demand of orthodox teas, the Central Government has introduced ‘Orthodox Production Subsidy Scheme’ from 1^st January 2005. The scheme, through Tea Board, provides for subsidy to the tea growers and manufacturers in India to boost production of high quality orthodox teas.

The Association requests inclusion of the Orthodox Production Subsidy Scheme also under Section 10(30) thereby making eligible for exclusion orthodox subsidy from the total income as applicable in the case of Replantation/Replacement/Rejuvenation subsidy. The Orthodox Production Subsidy, as in the case of Replantation/Rejuvenation Subsidy, is revenue in nature and is also disbursed through the Tea Board. Hence Orthodox Production Subsidy should be justifiably entitled to be exempted from total income under Section 10(30) of the Income Tax Act, 1961.

3. COFFEE & RUBBER DEVELOPMENT ACCOUNT SCHEME, 2004 UNDER SEC 33AB TO BE MADE OPERATIONAL

The Ministry of Commerce and Industry and Ministry of Finance has introduced the Coffee Development Account Scheme (CDAS) and the Rubber Development Account Scheme (RDAS) with effect from 1^st April 2004. The scheme is applicable to all the assesses carrying on the business of growing and manufacturing of coffee and rubber in India, who are eligible for deduction under Section 33 AB of the Income Tax Act, 1961. The scheme is applicable for the purpose of allowance of 40% deduction available under Section 33 AB.

In view of the losses in the coffee sector during the past few years, we understand that the scheme was not operated by any assesses until last year. However, while approaching NABARD for availing the benefit under the scheme this year, assessees was informed that the scheme is not in operation and hence could not make deposits with NABARD. In light of this, we request Finance Ministry to give suitable instruction to NABARD for operationalising the scheme with immediate effect so as to enable the coffee and rubber industry to avail tax incentive/benefit given to the industry under Section 33 AB of the Income Tax Act, 1961.

The tea plantation companies should be exempted from the provisions of Sec 115 JB of the Income Tax Act. Sec 115JB provides for exemption for agricultural income as defined in Sec 10. There are a number of practical issues that arise in computing the books profits under Sec 115JB in the case of tea plantation companies in view of the composite nature of business. Moreover, a few States have exempted agricultural income from tax, and hence we seek exemption for plantation companies from the provisions of Sec 115JB.

Introduction of tax on cash withdrawals from banks by the plantation industry has created a host of practical problems affecting the normal operations in the plantations. Plantations are situated in remote areas and especially in South India, they are located in the hilly terrains where there are no banks in the near vicinity and accordingly necessitates large portion of wages etc. to be paid in cash. Thus, tax on cash withdrawals from banks would impose additional liability on the plantation sector, considering the large volumes of cash being disbursed to the workers at the estate level. It may also be taken note that the plantations are mandated to pay wages in cash, as per the Payment of Wages Act, 1936.

6. EDUCATION CESS ON TEA CESS

In the Union Budget 2004-05, an Educational Cess of 2% was introduced on the aggregate duties of customs, excise and service tax. However, there was confusion regarding its applicability on Tea Cess paid by tea manufacturers at 30 paise per kilogram. The cess on tea is paid under the Section 25 of the Tea Act and is only collected by the Excise Department for the administrative purposes. The clarification issued by the Department for Revenue, vide circular F.No.345-2-2004-TRU (PT) dated 10^th August 2004 clearly indicates that the Educational Cess is applicable only to such duties which are (a) levied and collected as duty of Excise/Customs and (b) or both levied and collected by the Department for Revenue. The field formations in the North India has taken a stand that education cess is not applicable on tea cess since tea cess is being levied by the Ministry of Commerce. However, field formations in South India had taken a contrary view and were demanding education cess on tea cess, which was challenged by our Association. Subsequently, the matter has gone to appeals level wherein we had got a clarification that education cess is not applicable on tea cess as tea cess is being a levy imposed by the Ministry of Commerce, would not fall within the purview of the Education Cess imposed under Section 93(1) of the Finance Act, 2004.

However, given the different interpretations at the excise field formations, we request that the Department of Revenue issues a suitable clarification stating that levy of 2% educational cess is not applicable on tea cess as it is not levied by Department of Excise/Customs.

7. SERVICE TAX ON AUCTIONEERS’

In the Union Budget 2006, a few more services were brought under the ambit of service tax, which includes auctioneers’ services and accordingly service tax on auctioneers’ service was applicable from 1^st May 2006. As this would impose an additional liability on the ailing tea industry in terms of service tax on brokerage, we request Government to issue an Notification exempting auctioneers’ service for sale of agricultural produce such as tea as in the case of Governments Notification No.13/2003 dated 20^th June 2003, exempting business auxiliary services provided by the commission agents in relation to sale or purchase of agricultural produce.

8. VALUATION OF PERQUISITES

As provided in Rule 3 of the Income Tax Rules 1962, perquisites on account residential accommodation provided by the employer is calculated at 15% of the basic salary of the employees, although the Fair Rental Value at the market rate in most cases would be much lower, in view of the remote locations of tea plantations.

Moreover, perquisites in respect of the furniture provided in those residential accommodations is calculated at a flat rate of 10% whereas the actual depreciation allowable to the company on account of those pieces of furniture would be much lower in view of their low written down value.

Since the plantation estates are located in the remotest corners of the country and no alternate accommodation is available locally, the managerial personnel, under force of circumstances are to be provided with fully furnished residential accommodation to enable them to attend their routine duties round the clock.

In view of what has been state above, the Association suggests that for valuation of perquisites in respect of residential accommodation and furniture provided to the employees working in the plantation estate may be treated as ‘remote area’, similar to those working at a mining site or an onshore oil exploration site, or a project execution site or an accommodation provided in an offshore site, in consideration of these being considered as ‘remote area’.

9. FRINGE BENEFIT TAX (FBT)

Fringe Benefit Tax [FBT] was introduced in the Union Budget 2005-06. Fringe Benefit Tax is an expenditure of the companies on sales promotion, publicity, medical and other aids provided to employees as part of work benefits. The rate of tax was set at 30 per cent.

Importantly the definition of fringe benefits in Section 115WB is open-ended. Barring canteen and transport, it covers any privilege, service, facility or amenity, reimbursement, contribution to superannuation fund and so on, and extends to a host of expense heads by slapping a ‘deeming’ provision on them. Thus, any expense towards entertainment, festival celebrations, gifts, hospitality, use of club facilities, conference, sales promotion, use of telephone and so forth are all going to form the tax base for applying the percentages prescribed by the FBT regime. For instance, 50 per cent of expenses towards employee welfare, and 20 per cent of conveyance, tour and travel, will get taxed as fringe benefit.

Moreover, the provision under FBT constitute an Act within an Act as the Finance Act proposes a whole set of provisions on FBT, governing the filing of a separate return, advance tax, notice, best judgment assessment, tax payment, interest for delay, refund and so on.

The imposition of the FBT regime has thus created discontent as the nature of this levy appears to be that of an ‘expenditure tax’ and takes us back to the pre-1998 scenario when such expenditure were disallowed. Moreover, any company that was not liable to tax hitherto — such as foreign or loss-making corporates — will have to fork out FBT.

Some of the provisions under FBT necessarily needs a re-look. The contribution made by the employer to an approved superannuation fund is taxable under FBT. Superannuation fund is a pension fund framed by companies to provide retirement benefits to their employees. The rationale of such a tax in a country where there is no governmental old age security mechanism is questionable.

The medical reimbursement, which was exempt earlier, to the extent of Rs 15,000, is now taxable under FBT. This is neither fair nor warranted. Further, the employer-employee relationship between a tea company and a broker/buyer to whom it distributes free samples is not at all convincing. These are genuine business expenditure and should not attract FBT.

The Government has allowed concessional rate of FBT for certain industries considering their strategic importance. In this regard, we believe the plantation industry definitely qualifies for exemption of FBT considering its remoteness of location and also due to the obligation to provide benefits/facilities both direct and indirect to its employees.

10. EXEMPTION OF PLANTATION SECTOR FROM THE PURVIEW OF FBT

If total abolition of FBT is not possible, we suggest exempting the plantation sector from the purview of FBT. In this context, it is worth mentioning the concessions extended to few strategic sectors like hospital, information technology, pharma and construction, which provides for calculating fringe benefits at lower rate. We emphasis the plantation sector qualifies for more liberal and favourable treatment given the extended crisis it has to undergo in the last few years and not only that it supports a huge population base. Accordingly we request exemption of plantation sector from the purview of FBT.

11. EXTENSION OF IMPORT DUTY CONCESSION

By Notification No.11/2006-Customs dated 1^st March 2006 the concessional rate of import tariff of 5% extended to the plantation machineries in 2003 was extended for one more year for the period 1^st May 2006 to 30^th April 2007. While thanking Government for extending concessional tariff, we request that the same be extended for five more years from 1^st May 2007 to 30^th April 2012.

We note that while extending 5% concessional import duty on plantation machineries covering tea, coffee and rubber plantation sectors vide Notification No.175/2003-Customs dated 10^th December 2003 and inclusion of 5 more machineries used by plantation sector in the Union Budget 2004-05, some of the important machineries such as vending machines for tea and coffee, coffee espresso machines, mechanical driers, chain saws, hedge trimmers, earth & soil augers and telescopic pruners do not find place in the Notification under reference.

We shall be grateful if the above listed machineries are also considered for a concessional rate of import duty at 5%, the details of which are given below:

12. VALUE ADDED TAX (VAT) & CENTRAL SALES TAX (CST)

With the introduction of VAT system in the country, it was expected that there will be uniformity in the tax rate for all commodities. However, the expectations were belied as we note there are different rates of VAT followed in different State, not to speak on the States that have not implemented the VAT system. The case in point is 1% VAT rate for teas sold through auction centres in Assam (Guwahati auctions) and Kolkata (Kolkata, Jalpaiguri & Siliguri) whereas in Kerala (Cochin) and Tamil Nadu (Coonoor & Coimbatore) the VAT rate for auction sale is 4%. In Tamil Nadu, State Government sponsored TEASERVE auction, the rates have been fixed at 1%. Thus, it is clear that States that have joined the VAT system are not following an uniform tax structure, thereby scuttling the fundamental principles of VAT. We request that this anomaly be set right in the ensuing budget and also request for the abolition of CST with immediate effect. Accordingly, we suggest 1% VAT rate for teas sold through all auction centres in the country.