Blog‎ > ‎

FICCI seeks reduction in Cenvat on food processing in pre-budget memorandum

posted Feb 20, 2012, 11:47 PM by Puneet Goyal
Monday, February 20, 2012 08:00 IST 
Akshay Kalbag, Mumbai

The Federation of Indian Chambers of Commerce and Industry (FICCI) has prepared a pre-budget memorandum eliciting demands for the food processing and agriculture sectors in view of the presentation of the Union Budget 2012-13. The Budget will be presented by finance minister Pranab Mukherjee on March 16 this year.

With regard to the food processing sector, on top of the FICCI agenda is reduction in the current 10 per cent rate of central value-added tax (CENVAT) on a number of categories of items produced by the sector.

Further, FICCI wants the finance minister to put packaged drinking water, a common man's product, in the nil category, and exempt biscuits from VAT, or at least lower the rate of VAT on them.

It opines that a total macro view is necessary instead of focussing on the revenue-generating potential of levying excise duty on products. But if the government is unable to do away with the excise duty completely even after taking the revenue aspect into account, it must reduce the excise duty in a calibrated manner. This, it says, should be done in two phases: it should be brought down to four per cent in the first phase and reduced to zero in the second.

FICCI believes that biscuits should be treated as merit goods and therefore be secured in a more rational manner, as is done in the case of bread. After all, biscuits are a product of mass consumption across India and cut across all economic groups and geographical boundaries. They are eaten in larger quantities in the rural areas of the country and the brands that are sold at lower price points find more takers in the lower-income group.

In India, the value that accrues to consumers from the money spent on food products is an area to which a great deal of attention needs to be paid. Agriculture being the country's mainstay, there are obviously a number of natural products which offer a good value for the money spent on them (and a number of health benefits as well), but they have a very short shelf life and become unfit for consumption after a point. This results in collosal wastage of precious resources for the lower-income group, the memorandum points out.

Biscuits are one of the few manufactured food products that offer as much, if not higher, nutritional and calorific benefits as these agricultural products and at price points that are equivalent or lower than them. Moreover, they have a long shelf life and are more hygienically packed. 

According to FICCI, biscuits are a highly price-sensitive product. In the past, whenever the person holding the finance portfolio has levied a higher tax on them or whenever their prices have increased, it has resulted in a sharp fall in their consumption. Over the years, biscuit makers have done well to keep the price-sensitive profile of biscuits in mind and sought to maintain their prices at uniform level. Lower consumption obviously leads to lower production and this in turn results in a lower capacity utilisation within the industry. This leads to inefficiencies in the capital deployment in the industry. 

More than 3.5 million people have a direct or indirect association with the biscuit industry in India. A majority of those involved in the production process are either non-skilled or semi-skilled workers, who are bound to be adversely (and immediately) affected by the fall in production and consumption. In the biscuit industry, people are also employed in such functions as storage, transportation, distribution, marketing and retail. These functions are not localised.

The biscuit industry and the agricultural sector are directly linked. Wheat flour, sugar and vegetable oil, the raw materials required to manufacture biscuits, are either agricultural products or are manufactured in agro-based industries. In fact, more than half the retail price of biscuits is contributed by the costs incurred to acquire the agricultural raw materials required to make biscuits.

A number of state governments, in a bid to find analogous groupings of food products to fix the rate of taxation, seem to have lost their way, and their attempts to formulate a VAT structure for biscuits is case in point. Biscuits come closest to bread, another item of mass consumption that cuts across all strata of the society, in terms of health benefits and value, but biscuits score over bread as far as their shelf life is concerned. Therefore, the biscuit makers' contention is that the VAT on biscuits is in the range of 12.5 to 15 per cent, while bread is virtually exempt from VAT.

What also seems to be a matter of great concern to the biscuit industry is that foods that have significantly lower nutritional and calorific values, are perhaps eaten less and cost far less than biscuits are subject to four cent VAT in several states, which is a lot less than the tax rates for biscuits. 

Another area Mukherjee must look into is the soy processed food products sector. Currently, the excise duty being levied on these products, whose nutritional value is high, is between eight and 12 per cent. This is severely affecting the domestic consumption of these high-protein products. The World Health Organisation (WHO) has recommended that the consumption of soy processed food products be accelerated, which will only happen when the finance minister decides to do away with the excise duty on them totally.

The basic customs duty (BCD) on infant foods in India is 30 per cent (and the effective duty comes to about 36.14 per cent), which is quite high when compared to the BCD rates in other Asian countries. It is nil in Singapore and Malaysia, five per cent in Nepal and Indonesia, six per cent in Sri Lanka, and seven per cent in the Philippines. On the other hand, the BCD for preparations for infant use in India (under Chapter Heading 1806 90 of Schedule I of the Customs Tariff Act 1975) is only 17.5 per cent. The customs duty on preparations for infant use, put up for retail sale (under Chapter Heading 1901 10 90 of the aforementioned Act) should be treated on par with those under Chapter Heading 1806 90. Not only would this be in accordance to the accepted principle of natural justice, but it would also not violate the canon of formulation of customs duty which states that all classes of the same good should be treated equally.

The exemption clause under Notification 10/96 dated July 23, 2006, should be amended and aligned with the Indian Customs Tariff. It should read, “Fruit pulp and fruit juice-based drinks.” A notification to this effect under Section 11 C must be issued, so that the industry's interests for the past period are protected. 

Hulled, rolled and flaked oats must not be subject to any customs duty, under Chapter Headings 1104 22 00 and 1104 12 00 of the Tariff.

FICCI would appreciate it if the finance minister did away with the steep customs duty on the import of the plant and machinery used by them, said the memo. If the plant and machinery used by the food processing sector are exempt, the industry will flourish.

A majority of the ready-to-serve beverages are subject to excise duty on their maximum retail price (MRP), but iced tea is still subject to duty on its transaction value. Iced tea is classified under Chapter Heading 2101 2090 of the Excise Tariff Act and subject to 10 per cent excise duty. Neither the beverage nor the tariff heading is included in Notification Number 49/2008-CE (NT) dated December 24, 2008, which prescribes the rate of abatement in respect of the goods which are subject to excise valuation on MRP basis. The valuation of the said products for the purpose of paying excise duty is done under Section 4 of the Central Excise Act, 1944 (i.e. the transaction value) as against other goods which are evaluated on the basis of MRP under Section 4A. It is submitted to include the aforementioned tariff headings in the MRP abatement. 

Sugar-boiled confectionery in India is defined by rigid price points. Most sugar-boiled sweets are sold at either 50 paise or a rupee. Of late, the industry has been facing a high rate of inflation, both in terms of cost of inputs and distribution costs. In order to provide some much-needed relief to the industry, it is recommended that the central excise duty be realigned to one per cent, which is the rate imposed on other food products, including instant noodles, potato chips, conserves and chutneys, ready-to-eat packaged foods and instant mixes. Value-added dairy products such as Milkmaid and other processed packaged products should be exempt from VAT.

As for the agricultural and allied activities sector, FICCI has stated that it hopes the minister will grant value-added tax (VAT) and excise duty exemption on agricultural equipment and machinery but will like it to be applicable only when agricultural produce is physically transferred to warehouses. It also wants the import duties on laser land levellers and their components, such as transmitters and equipment related to water-saving techniques such as drip irrigation to be removed.
Comments