Pre-conditioning fresh farm produce

What the budget proposal means for cold-chain. 

(Union Budget of India 2015-16)

It is amply clear that to properly utilise the cold-chain, and to initiate a supply of fresh farm produce to consumers, the supply chain operator, at the source end (farm gate), needs to prepare the harvested produce for travel from farm gate to market. This involves pre-conditioning procedures (e.g. washing, waxing, de-sapping), retail packaging and labelling, pre-cooling, before undergoing climate controlled storage and transportation and ripening. None of these measures alter the essential characteristics of agricultural produce as no food processing is involved – the farm produce is delivered fresh and whole, from farm to market. These preconditioning procedures make it possible for agricultural produce to be marketed more efficiently and help to reduce losses in supply chain and to prolong the freshness of produce. 

Under the provisions in India’s Finance Act, in regards to service tax (see Section 66D (d) (iii) of Chapter 5 of Finance Act 1994 and Chapter VA of Finance Act 2003), processes carried out at an agricultural farm which do not alter the essential characteristics of agricultural produce but only make it marketable for the primary market do not fall under the Negative List. However, elsewhere (Section 65B(5) of the Act), “agricultural produce” is defined to mean any produce of agriculture on which either no further processing is done or such processing is done as is usually done by a cultivator or producer.

Actually these processes, to prepare a produce for safe onward trip to market, the earlier mentioned washing, sorting, packing, precooling, etc., are carried out at pack-houses operated by cold-chain operators. These pre-conditioning activities are not done at an agricultural farm, as in India most farm holdings are very small, but done at the level of aggregator at pack-house facilities. These activities are part of the supply chain, to improve the transportability of the agricultural produce to market, and also do not alter the essential and natural characteristics. There is no food processing activity involved and the primary idea of cold-chain is to deliver fresh to market.

The pack-house or cold-chain operators, when not the cultivator or producer, are entities like agri-entrepreneurs, supply chain services, cooperatives, FPOs, etc. These pack house operators must obviously undertake backward integration with the cultivators in organizing and facilitating such go-to-market preparatory activities. Yet, since they themselves are not the cultivators of the agricultural produce, the narrow interpretation of tax laws required that this service be subject to tax. The key initial activity in the fresh whole food supply was therefore not benefiting from the real intent of the Negative List provided in the Finance Act.

The taxing of these key back-end services, tended to discourage investment in agricultural supply chain, especially in the much needed back-end or farm gate, and could add to the cost of fresh agricultural produce in retail market.

The Hon’ble Finance Minister has therefore, in his 2015-16 budget speech, proposed that  “Services by way of pre-conditioning, pre-cooling, ripening, waxing, retail packing, labelling of fruits and vegetables which do not change or alter the essential characteristics of the said fruits or vegetables”, henceforth be exempted from service tax. This will translate into an immediate 14% benefit to the bottom-line in this trade. The refrigerated trasnport and storage of agricutural produce was already exempted earlier.

In effect, with this notification, in case of fruits and vegetables, the entire chain of activities (pre-conditioning, packing, et al at pack-houses; reefer transport; cold storage) is now exempted from service tax.

One hopes, the development of the much needed pack-houses, as source points of the fresh food cold-chain, will greatly benefit from this exemption. Remember, the farm gate needs to be connected in an uninterrupted fashion to consumers, to ensure that healthy fresh farm produce reaches all, everywhere. The pack house is the first step towards this end, not the cold store.

Eat fresh, eat healthy, understand the cold-chain.    

-Pawanexh Kohli