Tuesday, January 25, 2011 09:45:10 AM

National Cooperative Dairy

Federation of India Limited

Paper presented at XXXVI Dairy Industry Conference and appeared in Indian Dairyman, vol.60(3), pp.108-111 (2008)

Taxing Dairy Coops: A case for reconsideration

DV Ghanekar
Managing Director – National Cooperative Dairy Federation of India Ltd, Anand


Dairy cooperatives follow multi-tier structure - at the bottom, village level primary dairy cooperative societies; at district/Tehsil level, milk processing unions; and at the state level state cooperative marketing dairy federations. Village level primary cooperative societies form a milk union at district level to process their milk in a plant. Similarly, district level milk unions federate into a state level milk marketing federation for efficient marketing of their produce. On a closer look, you will find that these cooperatives are working for the same purpose i.e. maximising return for milk producers by adding value in different ways in the whole value chain.

Though village level dairy cooperative societies are exempted from payment of income tax, district and state level dairy cooperatives are levied tax. Secondly, basic rate of income tax (including surcharge) for domestic companies has come down to 33 per cent for the assessment year 2008-09 as compared to 46 per cent in the assessment year 1996-97. Whereas during this period, income tax rate for cooperative societies has marginally come down to 30 per cent from 35 per cent. The government appears to have overlooked the fact that unlike domestic companies which are investor oriented firms, the cooperatives are member controlled enterprises where economic activity is centered on the usage of services offered, by each member of the cooperative.

Government looks towards cooperative as an instrument of socio-economic development of weaker sections. Therefore, cooperatives cannot be equated with other profit making and commercial organizations. Hence, a different approach to deal with cooperatives is necessary.

This paper examines issues surrounding income tax of dairy cooperatives. It starts with brief introduction of dairying in India and cooperatives’ share in dairy development. Further sections emphasize the need to extend the income tax exemption to all dairy cooperatives. Concluding remarks are given regarding specific factors to consider while taxing dairy cooperatives.

Dairying in India

Dairying is an important contributor to the agricultural output of our nation. Milk production is an important rural activity in India providing supplementary income and employment to millions of rural households. Today, milk is India’s largest ‘crop’ in terms of its output value, surpassing even major cereals like rice and wheat. India is presently the largest producer of milk in the world and it is estimated that production of milk was 100 million tonnes in 2007.

Cooperatives’ milk business comes from more than 13 million small producers with an average herd size of just about 2 animals. Presently, our dairy sector employs 10 per cent of the country’s labour force. Small and marginal farmers (<2 hectares) together with the landless, account for more than 75 per cent of those 13 million rural milk producers who raise 60 per cent of the cattle.

Cooperatives in Indian Dairying

Cooperatives play an important role in the development of the Indian dairy sector. They are engaged in milk production, procurement, processing and marketing. The dairy co-operative system represents more than 13 million dairy farmers belonging to about 1.22 lakh primary cooperative societies, which sell their product to one of 198 milk producers’ cooperative unions, which in turn, are supported by state cooperative milk marketing federations.

Taxation of dairy cooperatives

In Income Tax Act, 1961, the main section governing the deduction for income of cooperative societies is section 80P. The main objective of section 80P is to encourage and promote the growth of cooperative sector.

According to section 80P, income of village level dairy cooperative societies are exempted from payment of income tax. However, this relief is not extended to district and state level dairy cooperatives.

Given below is a discussion in detail explaining the reasons why benefits of section 80P need to be extended to all dairy cooperatives.

1. Objective of income tax laws and cooperatives

The main objective of income tax law is to ensure equitable distribution of wealth by curbing its concentration in the hands of a few, and to mobilize adequate resources for the government so as to enable it to undertake various government programmes. There is a close unanimity in the aims and objectives of cooperative organizations and that of Income Tax. In fact, if cooperative sector is adequately strengthened and expanded, it can act as an effective supplementary instrument for government to achieve the fiscal objectives. The primary concern of cooperative organization is fulfillment of common economic interests of their constituents through mutual efforts. Therefore, whatever surplus is generated in this process belongs to members.

Income tax authorities do not make any distinction between an ordinary profit making concern and cooperative institution and deny concessions. This creates hurdles in the smooth functioning of cooperative institutions to achieve its objectives. Since the cooperatives have been recognized as agency for socio economic development particularly that of weaker sections, it is essential that they should be strengthened financially and an environment is created for them to plough back their savings for further capital formation.

2. Basic purpose of multi-tier dairy cooperatives

If we closely look at the multi-tier structure of dairy cooperatives, we find that these cooperatives work for the same purpose i.e. maximising return of the milk producers by adding value in different ways in the whole value chain.

The income generated by state level marketing cooperatives and district level milk unions flows back to village level primary cooperative societies and in-turn to milk producers. When the purpose for creation of multi-tier structure of dairy cooperatives is same, why then the cooperatives at district and state level are being taxed?

3. Provisions of section 80P

While section 80P exempts the cooperative societies which are engaged in the marketing of ‘agricultural produce’ grown by its members, no exemption is given to processing and marketing dairy cooperatives.

The expression ‘agricultural produce’ has not been defined in the Income Tax Act. Agricultural Produce is, therefore, that which springs directly from the agricultural operations carried on by the cultivator.

Dairying in India is an integral part of the total farming system. Symbiotic relationship exists between agriculture and dairy farming. The agricultural by-products provide feed and fodder for the cattle, whereas cattle provide necessary draught power for various agricultural operations. The policy makers consider dairying as basically an activity subsidiary to agriculture. The share of the ‘milk group’ in the total value of output from agriculture and livestock during 2004-05 (at current prices) was 17.89%. It means almost every fifth rupee generated from agriculture and allied activities in the country comes from dairying. Hence, there is a need to consider dairying as a part of agriculture and extend the benefit of 80P to all dairy cooperatives.

4. Definition of profit

A cooperative society is a union of ‘people’, but not of ‘capital’. Ideally, a cooperative should manage its affairs in such a way that it concludes every operation exactly at cost, without any surplus. This is what a cooperative ought to do, but is not always possible because of the unknown overall costs and risks involved. Hence, cooperatives show a surplus, but this is not a ‘profit’ since it is refunded to members in proportion to their business with the cooperatives.

Income tax on cooperatives obstructs the process of capital formation. Since cooperatives have been recognised as an agency for socio economic rural development particularly that of weaker sections, it is essential that they should be strengthened financially and an environment be created for them to plough back their savings for further capital formation. Keeping this aspect in view, it is necessary to ensure that the dairy cooperatives established in various segments be exempted from payment of tax.

5. Different views by various Government Departments

While Income Tax Department is taxing the dairy cooperatives at par with domestic companies, Animal Husbandry and Dairy Department (AH&D) recognize cooperatives as an instrument for generating additional employment and a tool for improving social, nutritional and economic status of rural people. Hence the AH&D has introduced a scheme of “Assistance to Cooperatives” which aims at revitalizing the sick dairy cooperative unions at the district and state level. The Central Government is implementing the scheme on 50:50 grant basis with the help of State Governments.

As mentioned in earlier sections bulk of milk producers are small and landless farmers. The ultimate goal for every farmer is to increase production and profit and thereby improving his standard of living and that of his family. Hence there is a need to support them by giving remunerative price for their produce. Accordingly, to maximize the returns of milk producers, multi-tier dairy cooperatives have been formed. Hence, taxing either district or state cooperatives is not only a disincentive and amounts to double taxation. This results in less remunerative price to milk producers and does not give proper signal to the farming community. The revenue gained by Government through income tax from dairy cooperatives is negligible. By foregoing this negligible revenue, Government can make an important contribution in facilitating capital formation by cooperatives and then make a case for not providing subsidies and grants to cooperatives.

6. Formation of reserves

Cooperatives have considerable amount of capability to raise ‘Reserves’. But, the question is whether the cooperative reserves really represent a form of profit as in the case of a ‘capitalist enterprise’. In a company, the reserves are always from profit and they always belong to capital. The greater the reserves, the higher the value of shares and a stock-holder can avail the profit by selling his share. But, the shares in a cooperative are non tradable and hence, have no extra value in the open market. Further, return on cooperative shares (dividend) is limited as per bye-laws.

The character of ‘cooperative reserve’ has been well expressed by Professor Charles Gide, the well-known French Economist. He compares cooperative reserves with ‘public-debts’ which he points, are funds used by the present generation, but paid by the future generation. Such reserves, therefore, are in the nature of a “donation” or a “sacrifice” by the present cooperative members in favour of the future generation. Hence, from the taxation point of view the reserves of cooperatives do not call for imposition of any tax.

7. Mobilisation of Capital

Capital accumulation in cooperatives is often difficult. It is shaped, and to some extent constrained, by a unique set of principles that define the cooperative identity and set it apart from ‘capitalist enterprise’. To survive and grow in an increasingly competitive business climate, cooperatives must raise more capital from their members and also possibly from commercial sources.

Raising capital from the primary members of dairy cooperatives is difficult task considering the financial conditions of members and cooperative principles such as ‘one vote for one member’. Further, members may be reluctant to invest in their cooperative for reasons such as: getting money ‘now’ is much more important to them than getting more money ‘later’ as a result of investment made now.

Mobilization of funds from commercial sources is not an easy task since the balance sheets of cooperatives may not reflect the healthy figures as cooperatives distribute its surplus to their members. Hence, raising capital by retaining surpluses is the most attractive way for dairy cooperatives to finance its growth, because: it does not have to be repaid; and, no interest needs to be paid compulsorily on the capital. However, for reasons mentioned above, creation of reserves are thus blocked in cooperatives.

8. Government interference

Many regulations governing the working of cooperatives were established long before the emergence of current trends in the world economy. Laws providing legal protection were enacted to justify and control cooperatives’ special business status. Many functions of cooperatives including finance and in some cases day-to-day administrative functions of cooperatives are controlled by Government. In some states, Government is fixing the milk procurement / selling prices for cooperatives. Such control on cooperatives is being exercised by Government considering the dairy cooperatives as a tool for rural development. The government is neither removing controls nor giving privileges such as income tax incentives etc.

9. Relocation of business

Capitalist enterprises relocate business operations for variety of reasons. Whatever the motivating rationale, the bottom-line is to improve competitive position and business performance. In case of relocation the producers and employees are at disadvantage. On the other hand, cooperatives are involved in the long-term process of positive social transition and are committed for voluntary principles over and above applicable legal requirements. These principles do not allow cooperatives to relocate even if the local Government policies and labour laws are not favourable as cooperatives are deeply rooted local bodies.

CONCLUSION: Cooperative Dairying to be viewed as a system

Cooperation is firmly rooted in Indian soil. Cooperation represents the finest qualities of our people; honesty, democratic consensus, mutual concern, and self-reliance. Dairying for Indians is not just producing yet another litre of milk. A vibrant dairy industry ensures an alternate source of income to the farmer members. It leads to an all round self-sustaining socio economic development at the village level. Emancipation of women, nutrition for the masses and all round social development are among other benefits, which, if not easily quantifiable, are very real and important. Our agriculture, our dairying, our villages, our ecology, our millions of milk producer women living in villages, our development and our democracy are all interlinked and interdependent. They should be looked as a system as a whole and not as one activity in isolation. Such an outlook towards the system will have far reaching advantages to the whole nation and its path of advancement towards becoming stronger nation.

A cooperatives’ income tax status affects not only its own operations but the operations of other cooperatives with which it conducts business. Hence, exempting all dairy cooperatives from Income tax will definitely be a step in right direction to promote the cooperative dairy sector in our country. Even otherwise, considering the facts mentioned above, there is a good case for the basic rate of income tax for cooperatives to be brought down to around 15%. This proposal is also consistent with the income tax policies for cooperatives in developed countries.