Harsh Jain

Introduction

Government is always committed to the welfare of farmers and the emphasis is on generating higher income for farmers. Government has promoted organic farming in a big way. The Honorable finance minister in his budget speech said that Organic farming by Farmer Producer Organizations (FPOs) and Village Producers’ Organizations (VPOs) in large clusters, preferably of 1000 hectares each, will be encouraged. Government has planned to extend a favorable taxation treatment to Farmer Producers Organizations (FPOs) for helping farmers aggregate their needs of inputs, farm services, processing and sale operations. At present, hundred per cent deduction is allowed in respect of profit of co-operative societies which provide assistance to its members engaged in primary agricultural activities. Over the last few years, a number of Farmer Producer Companies have been set up along the lines of co-operative societies which also provide similar assistance to their members. In order to encourage professionalism in post-harvest value addition in agriculture, Government proposes to allow hundred per cent deduction to these companies registered as Farmer Producer Companies and having annual turnover up to Rs.100 crores in respect of their profit derived from such activities for a period of five years from financial year 20 18-19.

What is a Producer Organization (PO)?

A Producer Organization (PO) is a legal entity formed by primary producers, viz. farmers, milk producers, fishermen, weavers, rural artisans, craftsmen. A PO can be a producer company, a cooperative society or any other legal form which provides for sharing of profits/benefits among the members. In some forms like producer companies, institutions of primary producers can also become member of PO.

What is a “Farmers Producer Organization” (FPO)?

It is one type of PO where the members are farmers. Small Farmers’ Agribusiness Consortium (SFAC) is providing support for promotion of FPOs. PO is a generic name for an organization of producers of any produce, e.g., agricultural, non-farm products, artisan products, etc.

Who is a primary producer?

Any person engaged in any activity connected with or related to any primary produce will be treated as producer. Primary produce means the produce of farmers from agriculture and allied activities or produce of persons engaged in hand loom, handicrafts and other cottage industries, including any by-product and product resulting from ancillary activities thereof. Primary produce also includes any activity intended to increase the production or quality of aforementioned products or activities. Persons engaged in agriculture, horticulture, animal husbandry, fishery, sericulture, apiary, hand loom, handicrafts, etc., can become members of appropriate PO. Persons engaged in collection of minor forest produce are also eligible for membership of PO although they gather these from forests and strictly are not producers.

Current tax ability position of farmer producer companies

Currently, all FPOs are not eligible for tax exemption on par with cooperatives. The Producer Companies are taxable on par with the Private Limited Companies and Public Limited Companies. However, the following are some of the various tax incentives available to the Producer Companies:

The Income derived by a Producer Company through agricultural activities as defined in Income Tax Act, 1961 as amended from time to time, is treated as agricultural income and is exempted from taxation.

The Government of India has vide the Finance Act, 2012, reduced the customs duty on the import of agricultural equipment and their parts which would benefit the Producer Companies engaged in agricultural activities to a great extent.

Producer Companies engaged in the business of growing and manufacturing tea or coffee or rubber are eligible for deduction in respect of deposit of any amount with a Nationalized Bank or any other bank in accordance with scheme as approved between the Company and the respective Board.

Section 80P of the Income Tax Act: 100% deduction available to farmer producer organizations registered as co-operative societies

Sub-section 1: Where, in the case of an assessee being a co-operative society, the gross total income includes any income referred to in sub-section (2), there shall be deducted, in accordance with and subject to the provisions of this section, the sums specified in sub-section (2), in computing the total income of the assessee.

Sub-section 2: The sums referred to in sub-section (1) shall be the following, namely:—

(a) in the case of a co-operative society engaged in—

(i) carrying on the business of banking or providing credit facilities to its members, or

(ii) a cottage industry, or

(iii) the marketing of agricultural produce grown by its members, or

(iv) the purchase of agricultural implements, seeds, livestock or other articles intended for agriculture for the purpose of supplying them to its members, or

(v) the processing, without the aid of power, of the agricultural produce of its members, or

(vi) the collective disposal of the labour of its members, or

(vii) fishing or allied activities, that is to say, the catching, curing, processing, preserving, storing or marketing of fish or the purchase of materials and equipment in connection therewith for the purpose of supplying them to its members, the whole of the amount of profits and gains of business attributable to any one or more of such activities:

Provided that in the case of a co-operative society falling under sub-clause (vi), or sub-clause (vii), the rules and bye-laws of the society restrict the voting rights to the following classes of its members, namely:—

(1) the individuals who contribute their labour or, as the case may be, carry on the fishing or allied activities;

(2) the co-operative credit societies which provide financial assistance to the society;

(3) the State Government;

(b) in the case of a co-operative society, being a primary society engaged in supplying milk, oil seeds, fruits or vegetables raised or grown by its members to—

(i) a federal co-operative society, being a society engaged in the business of supplying milk, oil seeds, fruits, or vegetables, as the case may be; or

(ii) the Government or a local authority; or

(iii) a Government company as defined in section 617 of the Companies Act, 1956 (1 of 1956), or a corporation established by or under a Central, State or Provincial Act (being a company or corporation engaged in supplying milk, oil seeds, fruits or vegetables, as the case may be, to the public), the whole of the amount of profits and gains of such business;

(c) in the case of a co-operative society engaged in activities other than those specified in clause (a) or clause (b) (either independently of, or in addition to, all or any of the activities so specified), so much of its profits and gains attributable to such activities as does not exceed,—

(i) where such co-operative society is a consumers’ co-operative society, one hundred thousand rupees; and

(ii) in any other case, fifty thousand rupees.

Explanation.—In this clause, “consumers’ co-operative society” means a society for the benefit of the consumers;

(d) in respect of any income by way of interest or dividends derived by the co-operative society from its investments with any other co-operative society, the whole of such income;

(e) in respect of any income derived by the co-operative society from the letting of go downs or warehouses for storage, processing or facilitating the marketing of commodities, the whole of such income;

(f) in the case of a co-operative society, not being a housing society or an urban consumers’ society or a society carrying on transport business or a society engaged in the performance of any manufacturing operations with the aid of power, where the gross total income does not exceed twenty thousand rupees, the amount of any income by way of interest on securities or any income from house property chargeable under section 22.

Explanation.—For the purposes of this section, an “urban consumers’ co-operative society” means a society for the benefit of the consumers within the limits of a municipal corporation, municipality, municipal committee, notified area committee, town area or cantonment.

Sub-section 3: In a case where the assessee is entitled also to the deduction under section 80HH or section 80HHA or section 80HHB or section 80HHC or section 80HHD or section 80- I or section 80-IA or section 80J, the deduction under sub-section (1) of this section, in relation to the sums specified in clause (a) or clause (b) or clause (c) of sub-section (2), shall be allowed with reference to the income, if any, as referred to in those clauses included in the gross total income as reduced by the deductions under section 80HH, section 80HHA, section 80HHB, section 80HHC, section 80HHD, section 80-I, section 80-IA, section 80J and section 80JJ.

Sub-section 4: The provisions of this section shall not apply in relation to any co-operative bank other than a primary agricultural credit society or a primary co-operative agricultural and rural development bank.

Explanation.—For the purposes of this sub-section,—

(a) “co-operative bank” and “primary agricultural credit society” shall have the meanings respectively assigned to them in Part V of the Banking Regulation Act, 1949 (10 of 1949);

(b) “primary co-operative agricultural and rural development bank” means a society having its area of operation confined to a taluk and the principal object of which is to provide for long-term credit for agricultural and rural development activities.

Government Proposes to extend the deduction under section 80P to the farmer producer companies

To promote agricultural activities Government proposes 100% deductions of profits for a period of 5 years to farm producer companies.

This deduction is allowed to farm producer companies who have total turnover of up to Rs. 100 crores during the financial year. For claiming this deduction, companies’ gross total income should include income from:

a) Marketing of agricultural produce grown by its members

b) Purchase of agricultural implements, seeds, livestock or other articles intended for agriculture for the purpose of supplying them to its members

c) Processing of agricultural produce of its members

Provisions of Companies Act 2013 for a Producer Company

1. A producer company is a hybrid between a private limited company and a cooperative society.

2. It combines the goodness of a cooperative enterprise and the vibrancy and efficiency of a company.

3. It accommodates the unique elements of cooperative business with a regulatory framework similar to that of a private limited company

Section 465 of the Companies Act, 2013:

i. The Companies Act, 1956 and the Registration of Companies (Sikkim) Act, 1961 (hereafter in this section referred to as the repealed enactments) shall stand repealed

ii. The provisions of Part IX A of the Companies Act, 1956 shall be applicable mutatis mutandis to a Producer Company in a manner as if the Companies Act, 1956 has not been repealed until a special Act is enacted for Producer Companies (1st Proviso to Section 465(1))

Therefore, there are no separate provisions under the Companies Act, 2013 regarding producer Company. As mentioned above it still govern by chapter IXA of Companies Act, 1956.

Allowed Activities for Producer Companies:

A producer company is basically a body corporate registered as Producer Company under Companies Act, 2013 and shall carry on or relate to any of following activities classified broadly:-

(a) Production, harvesting, processing, procurement, grading, pooling, handling, marketing, selling, export of *primary produce of the Members or import of goods or services for their benefit.

(b) Rendering technical services, consultancy services, training, education, research and development and all other activities for the promotion of the interests of its Members;

(c) Generation, transmission and distribution of power, revitalization of land and water resources, their use, conservation and communications relatable to primary produce;

(d) Promoting mutual assistance, welfare measures, financial services, insurance of producers or their primary produce;

Silent Condition for Producer Companies:

i. Only persons engaged in an activity connected with, or related to, primary produce can participate in the ownership.

ii. The members have necessarily to be primary producers.

iii. Termed as “Companies with Limited Liability” and the liability of the members will be limited to the amount, if any, unpaid on the shares.

iv. Name of the company shall end with the words “Producer Company Limited“.

v. On registration, the producer company shall become as if it is a Private Limited Company for the purpose of application of law and administration of the company

vi. However, it shall comply with the specific provisions of part IXA.

vii. The limit of maximum number of members is not applicable to these Companies.

Incorporation:

Any of the following combination of producers can incorporate a producer company:

i. Ten or more producers (individuals); or

ii. Two or more producer institutions; or

iii. Combination of the above two (10+2).

Share Capital:

i. Share capital of a Producer Company shall consist of equity shares only.

ii. Members’ equity cannot be publicly traded but only transferred

Voting

a. Only of individuals, then voting rights shall be based on a single vote for every member.

b. Only of producer institutions, then voting rights on the basis of their participation.

c. Combination of both individuals and producer institutions then voting rights shall be based on a single vote for every member.

Director:

Every producer company is to have

i. At least 5 and not more than 15 directors.

ii. A full time chief executive should (CEO) be appointed by the board and

iii. shall be entrusted with substantial powers of management as the board may determine.

If any director resigns from his post the election shall be conducted within 90 days from the date of resignation of such director. The Director shall hold his office for a period not less than 1 year but not more than 5 years as may be specified in the articles. Every director shall be eligible for reappointment. The Directors of the Board are elected by the members in the Annual General Meeting. The Board may co-opt one or more expert directors or additional directors not exceeding one fifth of the total number of directors. The expert director and additional director shall hold the post for the period as prescribed in the articles.

Reserves:

i. Every producer company has to maintain a general reserve in every financial year.

ii. Where there is no sufficient funds in any year for such transfer,

iii. The shortfall has to be made up by members’ contribution in proportion to their patronage in the business.

Members’ benefits:

i. Members will initially receive only such value for the produce or products pooled and supplied as the directors may determine.

ii. The withheld amount may be disbursed later either in cash or in kind or by allotment of equity

iii. Members will be eligible to receive bonus shares.

iv. An interesting provision is for the distribution of patronage bonus [2](akin to dividend) after the annual accounts is approved — patronage bonus means payment out of surplus income to members in proportion to their respective patronage (not shareholding).

Audit:

i. Producer Companies shall carry out an internal audit of its accounts, at regular intervals in accordance with its articles of association and such an audit shall be carried on by a Chartered Accountant.

ii. The auditor shall make an annual audit report to the members of the company on the accounts examined by him

An unnecessary stipulation is that “without prejudice to the concerned sections in the Act,” the auditors of producer companies have to specially report on some additional items such as debts due and bad debts, verification of cash balances and securities, details of assets and liabilities, loans extended to directors and details of donations and subscriptions.

Striking of name

The Registrar shall strike the name of the Producer Company if the company fails to commence its business within one year from the date of registration or ceases it transactions after giving a notice to the company. Any Member of the Producer Company is aggrieved against such order

(The author can be reached at harshjain93@icai.org)

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Category : Income Tax (27608)
Type : Articles (17255)
Tags : Budget (1957) Budget 2018 (400)

3 responses to “Budget 2018: FM Proposes 100% deduction to Farmer Producer Companies”

  1. Kumar says:

    Yes.But for registered as FPO, if you join with other ‘Farmers’ if feasible.

    A. Primary produce, in terms of the Act, is produce arising from agriculture by farmers and includes animal husbandry, horticulture, floriculture, viticulture, forestry, forest products, re-vegetation, bee-keeping and farming, plantation
    products, as well as the produce of persons engaged in handloom, handicrafts and other cottage industries, by-products of such products; and products arising out of ancillary industries.

    B. Coming to FPOs,can be formed by minimum 10 producers and should have a Board comprising 5 to 15 Directors, who are elected by the members either via direct voting or through
    representation of groups. The Board of Directors appoints a CEO for the day-to-day management of a Producer Company, and the CEO is assisted by staff.

  2. Rhea says:

    Sir,

    I have a query which no one has been able to resolve clearly.

    Does this 100% tax deduction also extend to dairy farming? Companies act includes animal husbandry in definition of agricultural produce.

    Or is it restricted only to crop cultivation based agriculture?

  3. Rohit says:

    Well Done Bro. It will help everyone in clearing their doubts.

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