INDIAN TEA ASSOCIATION

CENTRAL BUDGET 2011-12 PRE-BUDGET MEMORANDUM : ISSUES RELATING TO TEA INDUSTRY Kumar Saurabh

Current Tea Scenario Production The cost of production of Tea in India continues to be the highest among all tea producing countries. The high cost of production in India has been a critical factor impeding Indias competitiveness of India tea. The Tea plantation industry has passed through difficult times since 1999 when average price realizations in the auction centres fell sharply leading to losses across industry and closure of several tea estates in North and South India. Fortunately the situation has improved from 2008. This is welcome scenario as this will enable the tea plantation industry recoup accumulated losses and to make fresh investments for future growth. Tea production in 2009 touched 981 million kgs, 2010 will see a sharp decline to around 960 million kgs due to adverse weather conditions and virulent pest attacks. This will adversely affect the revenue stream of tea companies and further impact CoP. Exports 2010 is expected to see higher exports. During January to October 2010 exports are up by around 6 mkg vis--vis 2009. The ITA with the support of Tea Board is making strenuous efforts to increase exports. Tea Industry acknowledges the vital role of DEPB (Duty Entitlement Pass Book) & VKGUY (Vishesh Krishi Gramin Udyog Yojana) in promoting tea exports. In the fiercely competitive export market continuance of DEPB & VKGUY is called for in order to sustain competitiveness of Indian tea exports. Prices It would be noted that the gains in prices from 2008 after a prolonged recession have been largely offset by significant increases in the cost of key inputs such as fertilizers, coal, fuel, gas and electricity. A major component of the Cost of Production is the Cost of Employment which includes Social Welfare Cost on account of statutory provisions like water supply, medical, primary education, etc. to be provided to workers in India under the Plantation Labour Act. In addition to rising cost of amenities there is significant increase in the wage cost which is periodically revised through bilateral negotiations.
While the Tea Industry and the Tea Board has already taken active measures towards reviving the Tea sector, there is need to address certain key issues in the forthcoming Central Budget 2011-2012 towards laying a foundation for sustainable growth which will help protect employment in this highly labour intensive industry.

Issues DIRECT TAX 1. Section 33AB of the Income Tax Act 1961: Migration to Direct Tax Code

Justification The provision was first introduced in the Income Tax Act in 1985 keeping in view the volatility and cyclical nature of Tea prices --- given that Tea is largely traded at the commodity level and susceptible to the vagaries of global Demand:Supply. The intrinsic logic was that Tea Companies should be induced to set aside profits in good years for deployment in development activities in relatively poor years. Section 33 AB which had been initially introduced in respect of Tea, currently covers Tea, Coffee and Rubber providing a deductible allowance of upto 40% pre-Tax profits. Section 33 AB provisions have also received endorsement in the Report of the Committee on Competitiveness of the Indian Tea industry which had been constituted by the Commerce Ministry under Shri S. N. Menon, former Commerce Secretary, Government of India.

Suggestions for Consideration The ITA is aware that the Government of India in presenting the Direct Tax Code seeks to consolidate and amend laws relating to Direct Taxes --including Income Tax --- towards an efficient and equitable Tax system. The Government furthermore has undertaken a comprehensive review of Tax incentives. While the general philosophy of the Direct tax Code of migrating from profit linked incentives to investment linked incentives is appreciated, ITA would submit that the Sec.33AB provisions, in effect, clearly mandate that investments in key developmental activity have to be undertaken from the deposits made by tea companies (out of pre-tax profits) with the NABARD. The ITA would therefore request the Government of India for incorporation of Section 33 AB provisions in the forthcoming Direct Tax Code.

INDIRECT TAX 2. Continuance of

concessional Customs Duty on Specified Tea Machinery Items

In order to give thrust to value addition and quality upgradation the Government extended the benefit of concessional import duty @ 5% on certain plantation machinery vide Notifications No. 175/2003-Customs and No. 176/2003Customs both dated 10.12.2003. The Government thereafter has been extending the benefit every year. The last extension of the concessional basic Customs Duty of 5% has been done vide Notification No. 21/2010-Customs dated 27.12. 2010 which remains valid upto 31stMarch 2011 for the following items:Machinery for Tea Plantation Sector (i) Tea bagging machine, falling under tariff item 8422 30 00

The Association would request the Government to extend concessional duty for the said machinery items to Nil for a further period of 3 years from 1st April 2011 with Nil Special Additional Duty.

Issues

Justification
(ii) Tea packaging machine, falling under tariff item 8422 30 00 (iii) Colour sorting machine, falling under subheading 8433 60 (iv) Tea leaf cutting-rolling machine, falling under tariff item 8438 80 (v) Mechanical harvester, falling under tariff item 8433 59 00 (vi) Tea pruning machine, falling under tariff item 8201 60 00 (vii) Mist blower, falling under tariff item 8414 59 20 (viii) Sprayer, falling under tariff item 8424 81 00 (ix) Rotary Sifter falling under tariff item 8433.60 (x) Lateral Cyclone Winnower falling under tariff item 8433.60 (xi) Dividing Bypass 8438.80 falling under tariff item

Suggestions for Consideration

After a long recessionary period the industry is now poised for growth and development. At this time the industry should be supported with continued concessional facilities as it will enable tea industry to upgrade processing infrastructure particularly towards valueaddition. Now that peak rate of import duty of all items have considerably reduced since 2003 when 5% concessional import duty was effected, it would be helpful to the tea industry if the concessional duty for the above machinery items is reduced to Nil towards containing the cost of the final product and make Indian tea globally competitive in export market. In the world market the use of Tea Bags Towards and Multiwall Paper sacks is rapidly exports

3. Concessional Import Duty

a major with

thrust in particular
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Issues of Certain Other Vital Items

Justification increasing. Demand for Filter Paper, Nylon Cloth, etc. in Tea Bags has therefore been continually increasing. Total incidence of Duty on importation of Filter Paper for use in Tea Bag under is very high (36.2% with Basic Duty 16% & other incidental duties), making the final product non-competitive in the international market. Filter Paper is a critical requirement in Tea Bag. The following items are of vital importance in order to scale up value addition and exports :
a) Filter paper (falling under tariff item 4823.20) b) Nylon Cloth for Tea Bags (tariff item 5911.90) c) Multi-Wall Paper Sacks (tariff item 4819.40) d) Kraft Paper (tariff item 4810.39) e) Tissue Paper (tariff item 48.02)

Suggestions for Consideration emphasis on value-addition and quality upgradation the Association would request The Ministry of Finance is urged to take appropriate action towards fully exempting Customs Duty on the Filter Paper. It would be further urged that import duty of Nylon Cloth, Multi-Wall Paper Sacks, Kraft Paper and Tissue Paper should also be made Zero.

These products are either not available in the indigenous market or are of very poor quality. Since the Filter Paper continues to be unavailable from domestic manufacturers, total Customs Duty exemption on import of OTHER FINANCE RELATED ISSUES 4. Continuation of The Orthodox Subsidy Scheme, launched Orthodox in January 2005 to boost production of Subsidy Orthodox Tea, has helped in correcting the Scheme product-mix and enabled availability of more Orthodox variety of teas for sustaining the Indian exports. Due to nonrelease of fund by the Ministry of Commerce Tea Board is yet to release the subsidy for 2008-09. Being appointed by Tea Board M/s A C Nielsen has strongly recommended the need for continuance of the Scheme for the balance period of 11th Plan Period and extend for the 12th Plan Period. The high cost of production (CoP) in India has been a critical factor impeding Indias competitiveness. A major component of the CoP is the cost of employment which includes social welfare cost. Welfare cost inclusive of the concessional value of food grains supply to tea estate workers work out to more than Rs. 8/- per kg. of made tea. The Association would request the Government to allocate adequate funds to the Ministry of Commerce to enable Tea Board to disburse fund for backlog period of 2008-09 & 2009-10 and also to cover 201011 & the balance period of 11th Plan Period. The Ministry is also requested to extend the Orthodox Subsidy Scheme for the 12th Plan Period. (i) ITA would request the Government to evolve a suitable mechanism whereby this high social welfare cost could be substantially mitigated. (ii) Moves should be initiated to examine whether various Government schemes relating to : Sanitation
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5. Sharing of Social Cost

Issues

Justification The Inter Ministerial Committee (IMC) recommended sharing of Social & Infrastructural cost between Industry and Central & State Government in the ration 50:40:10. Subsequently another Committee under the Addl. Secretary (Plantation), MoC examined ways to tailor & implement various Government Schemes towards defraying cost in certain areas like medical facilities, education, sanitation, conservation, drinking water etc.

Suggestions for Consideration

(Total Sanitation Campaign) Medical facilities (through NRHM) Education (through Sarva Shikshya Abhijan)

could be extended to the tea plantation sector. (iii) Substantial expenditure is incurred for construction of Housing for workers. ITA would suggest for re-introduction of the Loan-cum-Subsidy Scheme based on current cost of construction, as per the Government specifications, of a workers quarter.

6. Sharing of Security Costs

(iv) Food grain subsidy is a high cost component. Government is urged to consider issuing foodgrains at BPL rate for at least the non-working segment of the dependent population residing in the estates. In order to restore confidence and morale The ITA represented to the both of the management and workers of the State & Union Government for Tea gardens in Assam in the midst of high financial support towards maintain insurgency, the Association raised a the Security Force. Security Force (namely ATPSF) in 1993 as - The Government of Assam, per State Governments advice. thereafter, approached the Union Home Ministry for The Government of Assam has additional funds to support the restructured the ATPSF to form the Assam State Force deployed in the Industrial Security Force (AISF) in 2009 for Tea sector. giving permanency and conferring higher - The Union Home Ministry also pay structure in the line with the Assam recommended this case to the State Police under which the annual cost Finance Ministry. per unit has gone up from Rs 10.4 lakhs to The Finance Ministry is around Rs 28 lakhs. understood to have conveyed its The annual aggregate expenditure for the inability to provide funds under users as a whole works out to around Rs the Security Related Expenditure 30 Crores with the incidence of cost (SRE head) stating that such between Rs 2 to Rs 3 per kg of made tea. funds cannot be made available This is unsustainable for the tea for a private force. gardens. It is clarified here that the AISF is a Government Force raised by the State Government and deployed to the tea industry. The issue of financial support for the Force, therefore, needs sympathetic review.

It is to be mentioned here that the Indian tea industry is serving National priorities by way of
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Generating income and livelihood directly or indirectly for more than 10 million people in the country Women account for 50% of employment Supporting socio-economic development in remote and under-developed regions such as the North-East.

The Association trusts that the above submissions would be favourably considered by the Ministry of Finance, Government of India for the Union Budget 2011-12.

15.12.2010 SP:RNC: central-budget for 2011-12