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G. Chandrashekhar

Mumbai , Dec. 26

CORPORATES engaged in production of processed foods have started lobbying for abolition or minimisation of taxes in the food channel.

One of the reasons is that at the prevailing levels of taxes, evasion is high in the unorganised sector, which affects the competitiveness of the organised sector. A major challenge facing the country's food processing sector is the highly fragmented nature of processing industries. The sector is characterised by a large number of small players using traditional technology and suffering poor scale economies. Broadly, the industry is engaged in processing of foodgrains, oilseeds/oils, production of sugar, aerated water, milk and dairy products, and fruits and vegetable processing, apart from others such as meat and meat products, confectionery, breakfast foods and so on.

The highly fragmented nature of the industry may be gauged from the following numbers. For foodgrain processing there are 91,000 huller rice mills and 43,000 sheller (modern) rice mills; 800 roller flour mills; 260,000 small flour mills; and about 10,000 dal mills. In the vegetable oils sector, there are 20,000 oil mills; 800 solvent extraction plants; over 600 refineries and 200 vanaspati units. Nearly 500 sugar mills have been established in the private, public and co-operative sectors. There are 650 sweetened and aerated water units, while milk products units number over 90. For fruits and vegetable processing, there are over 4,900 units, most of them very small at about 1 tonne per day processing capacity.

Apart from sales tax and certain local levies, excise duty forms a major incidence of tax. However, a large number of products in the food processing sector are already exempt from excise duty. Over the last three years, the Government has progressively reduced the excise duty burden on a number of products. Currently, the maximum rate of excise duty is 16 per cent, except for aerated water and soft drinks the manufacture of which attracts 24 per cent duty (reduced from 32 per cent with effect from March 2003).

Major items liable to 16 per cent duty include cocoa preparations and chocolate, meals, pasta, breakfast foods, malt extract, protein isolates and high protein foods, and non-alcoholic beer like fruit beer. Some of these items attract excise duty only if put up in unit containers.

Over the last two years, excise duty on the number of products has been reduced. For instance, from 2001-02 onwards, preparations of fruits, nuts and vegetables such as jams, jellies, marmalades, fruit juices etc attract nil duty. Same is the case with sauces, ketchup, broth etc where excise duty has been done away with. In March 2003, excise duty on sugar confectionery and biscuits made with the aid of power was reduced to 8 per cent (from 16 per cent earlier). It will be seen that most food products that are in the excise net are those generally consumed by the well-to-do sections of the population. These sections, mainly urban consumers, are willing and able to pay a premium price for assured quality.

This segment of the population provides an excellent opportunity for the food processing industry to tap. The onus is on the industry to service this growing segment by supplying products, of convenience, quality and safety. While there is a definite case for rationalising taxes, especially local levies, it is necessary to mention that reduction or elimination of taxes alone is unlikely to make the industry competitive. Also, the Indian industry is not exactly known for sharing the benefits of lower fiscal imposts with consumers.

According to the Ministry of Finance, total revenue collected on excisable products of food processing industries was Rs 2,049 crore in 2000-01 which declined to Rs 1,688 crore in 2001-02 but rose to Rs 1,881 crore in 2002-03. If the organised sector is aggrieved that the unorganised sector evades taxes, the remedy would be not abolition of taxes altogether, but to tighten the collection mechanism. Looking at the size of the food processing sector, there is scope for generating much higher levels of revenue if collected systematically. There is no doubt, the nascent food processing sector needs support. State Governments can encourage the sector by strengthening rural infrastructure and supporting contract farming initiatives.

On its part, the industry must work out a plan for gradual consolidation of fragmented capacities. Supply chain efficiencies alone will deliver lasting benefits. For this, corporates engaged in food processing activity, in particular, must begin to establish backward linkages. They must encourage production of what the market wants rather than buy what the farmer has produced. Scale and integration alone will help achieve desired results. There is scope for meaningful disintermediation in the existing long supply chain. The economic benefits of these will far outweigh the taxes currently levied.

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