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The progressive intent underlying the company structure of doing business by farmer collectives has nevertheless thrown up regulatory and compliance challenges. The bottlenecks need to be recognised and addressed to foster heathy growth of these promising nascent institutions.
Despite the unprecedented growth in the number of FPOs (Farmer Producer Organisations) being formed across the country, no systematic study on their performance on regulatory and statutory compliances has been undertaken. What are the issues faced by the FPOs? Are these mere teething problems or do they need policy changes?
Such questions prompted us to undertake a survey among FPOs to assess and quantify the issues rather than rely on anecdotal information. Towards this, we prepared a questionnaire and circulated among various FPO networks to elicit responses from promoting institutions and FPOs. In all, we received 129 responses, 101 of them being FPCs (Farmer Producer Companies). 75 of the 129, (50% of them registered in 2020 or thereafter) had done no business so far, while 17 had a turnover exceeding Rs 1 Crore. While responses were received from FPOs of 16 states, about half were from Andhra Pradesh due to the demand from members in the group. The emergent themes are discussed below:
Challenges with Goods and Service Tax (GST)
Section 22 of the CGST Act 2017, makes it mandatory for anyone with a turnover in a financial year exceeding Rs. 20 lakhs to have GST registration. While Section 23 exempts an agriculturist from GST registration even if turnover exceeds specified limits, Section 24 mandates compulsory registration for interstate supply of goods/service with a few exceptions.
However, promoting institutions often advice FPOs to register for GST even if these are not immediately required for their scale of business/for the specified supply of goods. Once registered, invoices need to be GST compliant and returns need to be filed monthly/quarterly, even when there is no turnover, failing which penalties are levied.
While 111 of the 129 FPOs had GST registration, 63 had no turnover in the preceding Financial Year (FY22). The average annual cost of filing nil returns, even if on a quarterly basis is Rs. 24,000 a year if done through an accounting firm.
Late filing of the GST returns attracts a penalty of Rs. 200 per day capped at Rs. 5,000 per month. In case GST dues are not paid within the stipulated time, interest of 18% per annum on the unpaid dues is charged. Amongst the 111 FPOs, 22 had paid GST penalty for non-compliance and the amount of penalty paid was nearly Rs one lakh in one case, and 12 FPOs with nil turnover paying penalty ranging from Rs. 1500 to 7500. 24 FPOs expressed difficulties in filing GST Returns.
A further complication is that Section 89 of GST Act imposes liability on the directors of the company in case of any dues/fines/penalties not being able to be recovered from the company. Such provisions could create hesitation in becoming a director when the post lacks incentives but is loaded with risk.
Income Tax woes
In February 2018, the then Finance Minister announced exemption from Income Tax to FPOs (specifically FPCs) having turnover of upto Rs. 100 crore for a period of five years from the financial year 2018-19. However, the Income Tax Act has another provision called Minimum Alternate Tax (MAT) applicable to companies. This has effectively nullified the tax benefit to FPOs. Currently MAT rate is 15% of the book profits plus surcharge and cess. This has resulted in FPCs suppressing profit to minimum, resulting in very little capital formation at the FPO level, stunting their growth and ability to leverage debt.
Turnover (Rs) | FPCs paying Income Tax |
Less than 10lakhs | 9 |
10lakhs-25lakhs | 2 |
25lakhs-50lakhs | 2 |
50lakhs-1crore | 1 |
More than 1crore | 11 |
Total | 25 |
Challenges with Companies Act
The Companies Act was amended to facilitate registration of the FPCs under Part IXA of the Companies Act. Later, when Companies Act 2013 replaced the erstwhile act, Chapter XXIA was introduced and became effective from February 2021.
In the absence of any specific provision, the same law as applicable to the other corporates apply to FPCs. For instance, Director of an FPC is considered on par with any other company director and the compliances include having a Director Identification Number, annual KYC requirements, returns to be filed for appointment, resignation, or vacation of office. Moreover, on becoming director, they are being denied the facilities under Government programs such as PM Kisan, Rythu Bharosa, pension, even though the person is just a small farmer, and the position of Director of the FPC does not carry any remuneration.
Penalties for non-compliance are stringent, for example in the case of failure to file the financial statements before the stipulated time, a minimum penalty of Rs. 10,000 is levied with an additional Rs. 100 per day of continuing default subject to a maximum of Rs. 2 lacs levied on the Company and its directors.
DIN KYC introduced in 2018-19, as per which, individual who is allotted DIN as on 31st March of a financial year must submit his KYC on or before 30th September of the next financial year, failing which such DIN is ‘Deactivated’ until KYC is completed with a penalty of Rs.5000. Yearly DIN KYC verification is complicated, as FPC Directors do not access OTP from their personal mobile and emails.
Active disincentives for farmers to remain FPC directors
Professional tax is levied by the state governments on any person engaged in a profession, trade, calling or employment. The Directors of FPCs are only paid honorarium and there is no employer-employee relationship, but are being asked to pay professional tax. Professional tax is collected for the establishment and for the directors at Rs. 2500 each per annum.
Together, these factors have contributed to a growing unwillingness among directors of FPCs to continue as directors, some of the major reasons being:
Losing government benefits like PM Kisan/ Rythu Bharosa’s benefits.
FPC’s loan reflecting in their Credit Bureau report causing problems for personal loans.
Cumbersome compliances/ penalty provisions on non-compliance.
Lack of remuneration or incentives given that FPO directorship requires significant time and resource commitment.
Roadmaps for building enabling ecosystems
Some actions that could immediately ease the regulatory and compliances burden on FPOs need to be implemented at national and state level. These include:
Central Government:
Reduce MCA compliance on the lines of One Person Companies (OPC)/Limited Liability Partnerships (LLP) for FPCs.
Exempt DIR 3 KYC for Directors of FPCs.
Make it easy for the Directors of FPCs to be changed without DSC.
Reduce the fees for the AOC4, MGT7 and other filings / exempt FPCs with upto Rs 50 lakh turnover.
Exempt FPOs from MAT
State governments:
Exempt FPOs and Directors of FPOs from levy of Professional Tax.
Non-exclusion of Directors of FPOs from being eligible for getting benefits under government schemes.
Regulatory compliances form an integral part of the conducive environment for FPOs to thrive. However, there is urgent need to rationalize and lessen the burden of compliances on FPOs and introduce a lighter regulatory regime. Failing to remedy these bottlenecks is hurting in achieving the intended objectives behind promoting FPOs. There is also a case for considering whether the company form is best suited in cases where the turnover is not large.
Emmanuel Murray is Investment Director at Caspian Impact Investment Adviser Ltd.
Mohan Kadimpalli is a practicing Chartered Accountant.
Atul Daga is Impact Associate at Caspian Impact Investments.