November 5: Tea companies may soon have to pay an additional tax of over eight per cent with the deletion of Section 33AB in the working draft of the Income-Tax Bill, 1997. The section allowed the companies to deduct from taxable income 20 per cent of their pre-tax profits if the amount was deployed in plantation activities.

This particular section was applicable only to the tea industry and was an incentive for growers for putting in more funds into existing plantation activities. Moreover, it was a kind of forced investment as 20 per cent deduction before taxation was mandatory for companies producing tea.The omission of the provision in the present bill would mean an extra eight per cent for the companies, taking into account the corporate income tax (CIT) and agricultural income tax (AIT).

The tea industry was demanding an increase in the amount deducted under Section 33AB from 20 per cent to 30 per cent. Now, it is believed, it will take up the issue with the finance ministry on Thursday and press for retaining the clause.

Under Section 8 of Income-Tax rules, the tea industry has a dual taxation system where 40 per cent is subject to corporate income tax and the remaining 60 per cent is taxed by state governments under their respective agricultural income tax acts.

So long, 35 per cent CIT was imposed on 40 per cent of the pre-tax profit after deduction of 20 per cent (i.e. 11.2 per cent of the total pre-tax profit). Thereafter 60 per cent of pre-tax profit after deduction was subjected to agricultural income tax, which differed among states. In Assam, the main tea growing area, it was 45 per cent (i.e. 21.6 per cent of the total pre-tax profit). Therefore, the total tax worked out to 32.8 per cent. If Section 33AB is deleted, it would increase to 41 per cent.

Taxes apart, the system of depositing funds with Nabard has enabled the tea industry to put aside a portion of profits in exceptional years for investment in lean years.

Apart from bringing down the effective rate of taxation, this incentive gave a scope to the industry to generate sufficient internal resources specifically earmarked for tea gardens.

Industry watchers feel the withdrawal of 33AB will not solve the differential incidence of taxation which continues to exist between tea and other industries. Instead, restoring 20 per cent in the new bill would provide greater incentive towards reinvestment in developmental activities by the companies.

The amount deducted so far had to be deposited with the Nabard, which could be utilised in fund investments in specified items of development such as extension planting, replanting of old tea bushes, infilling and rejuvenation, pruning, modernisation and upgradation of labour welfare measures.

The section was introduced in 1985-86 by way of a development fund which allowed 20 per cent deduction in respect of deposits made by Nabard under a scheme formulated by the Tea Board.

With the announcement of the long-term fiscal policy in 1986-87, a new Section 32AB introduced an Investment Deposit Account in the Income-Tax Act, modelled on the lines of 33AB. Initially, this was made applicable to industries other than tea.

Since it had certain advantages over 33AB, strong representations were made by the tea industry to extend the scope of 32AB to tea. This was favourably considered by the government and tea companies were given the option of availing themselves of either 32AB or 33AB.

Thereafter in 1990, corporate income tax was reduced to 40 per cent and section 32AB was withdrawn and a revised version of 33AB was introduced, which again prompted the tea industry to make fresh representations.Tea deposit account scheme likely to go

The deletion of Section 33AB in the Working Draft of Income Tax Bill, 1997 would mean the closure of the tea deposit account scheme (TDAS) for National Bank for Agriculture and Rural Development (Nabard).

Nabard officials told The Financial Express that this would lead to withdrawal of quite a large amount from deposits made by tea companies for use during later periods.

About Rs 80 crore has been deposited under this scheme. However, this may differ from year to year, depending upon the various agro-climatic factors that determine the profits of a company.

"The year 1997-98 is a particularly good year for the industry as prices have escalated several times.As a result most companies would be in a position to deposit a higher amount at the end of the current fiscal", said an official.

The apex agricultural bank, however, did not invest these funds as companies could withdraw them when required and a one-year lock-in period had been discontinued for the last three years.According to the official, hectic withdrawals were made by smaller companies who needed finance more than required by larger companies which always have had a running balance.

Apart from the TDAS, Nabard also refinances 50 per cent of loans from commercial banks by the tea companies for availing of various schemes.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.