Producer Company: Requirement, tax benefits & government schemes

Producer company, overview, basic requirement, tax benefits and government schemes for Producer Company

Introduction of Producer Company

A producer company can be defined as a legally recognized body of farmers/ agriculturists with the aim to improve the standard of their living, and ensure a good status of their available support, incomes and profitability. Under Companies Act 2013, a Producer Company can be formed by 10 individuals (or more) or 2 institutions (or more) or by a combination of both (10 individuals and 2 institutions) having their business objective as one of the following:

• Procurement
• Production
• Harvesting
• Grading
• Pooling
• Handling
• Marketing
• Selling, or
• Export

Basic Requirement for incorporation of Producer Company

• All Producer companies are private limited companies.
• Though it is private limited companies, its members can be more than 50 members.
• Minimum 10 or more individuals, being a producer, or any two or more producer companies, or combination thereof, are required to form Producer Company.
• All Producer Company shall have at least 5 directors but not more than 15 directors.
• Conversion is not possible into any other business structure such as Private Limited company, Public Limited Company, LLP etc.
• It can never be converted into a public company however it can be converted into a multi-state co-operative society.
• Every Producer Company must contain words like “Producer Company Limited” at the end of its name.
• Minimum Paid-up capital must be Rs. 5 lakh.
• Voting rights in this kind of companies are aligned with the principle of “one man-one vote”, regardless of shareholding in the producer Companies.

Tax Benefit to Producer Company

• The Income Tax Act, 1961 under section 10(1) exempts the agricultural income. However, the exemption provided under section 10(1) for the agricultural income sometimes vary on the basis of the agricultural activity carried out.
• The Income Tax Act does not specify any specific tax benefit which essentially provides special tax benefits or exemptions to producer companies by its definition. But subject to the agricultural activity carried out by the producer company, certain tax benefits and exemption can be availed.
• For example, income derived from selling the grown green tea leaves is an agricultural income under the Income Tax Act and it is 100 % tax-free. However, if the tea leaves are further processed for the manufacturing of tea, only 60% of such income will be considered as agricultural income and 40% of such income will be taxed.
• Thus, it is apparent that the tax benefit and exemption to a producer company is totally depending upon the activity it carries on.

Government schemes for Farmer Producer Companies

Small Farmers Agri-business Consortium (SFAC) was mandated by Department of Agriculture and Cooperation, Ministry of Agriculture, Govt. of India, to support the State Governments in the formation of Farmer Producer Organizations (FPOs). The initiative which started in 2011-12 under the two Central Sector Schemes of Vegetable Initiative for Urban Clusters (VIUC) and Integrated Development of 60,000 Pulses Villages in Rainfed Areas has expanded in its scope and covers special FPO projects taken up by some State Governments under general Rashtriya Krishi Vikas Yojana (RKVY) funds as well as under the National Demonstration Project under the National Food Security Mission (NFSM) and Mission for Integrated Development of Horticulture (MIDH).

In many of the Central Sector Schemes like National Vegetable Initiative for Urban Clusters (VIUC), Mission for Integrated Development of Horticulture (MIDH) and National Food Security Mission (NFSM) under which funds are allocated to States, there is a provision for promotion of Farmer Producer Organizations (FPOs)’. After Central allocations are made under these programmes to the States in a particular financial year, States prepare the Annual Action Plans for approval by the State Level Sanctioning Committee (SLSC) chaired by the Chief Secretary. In doing so, many of the States provide for adequate outlay for the FPO promotion component also, amongst others. After approval of the Action Plan by the SLSC, many of the States approach SFAC and transfer requisite funds to it for implementation of the FPO promotion work.

In order to support the FPOs in terms of strengthening their capital base, SFAC has launched a new Central Sector Scheme “Equity Grant and Credit Guarantee Fund Scheme for Farmers Producer Companies” on 1st January, 2014. The Scheme has two major components:

a) Equity Grant Scheme: A grant of upto Rs.10.00 lakh is provided to each registered Farmer Producer Company (which is registered under the special provision of the Companies Act) to mach the member equity raised by the institution. This will enhance the equity base of the FPC and enable it to approach financial institutions for raising working capital.

b) Credit Guarentee Fund (CGF): The CGF will offer a cover of 85% to loans extended by banks to Farmers Producer Companies without collateral, upto a maximum of Rs.1.00 crore.