Under the Constitution, agricultural income can be taxed by the State and not by the Centre. However, in the case of tea, the Centre contended that there was a substantial manufacturing process involved in the production of tea; hence, income from tea could not be classified as fully agricultural income and that a part of the income had to be taxed as central income.
This was done under Sec 8 of the I-T Act, which stated that due to the manufacturing activity involved, 40% of the income would be taxed by the Centre.
In 2002, the Centre then followed the same logic and introduced Sec 7 & 7B for rubber and coffee respectively. It decided to partially tax the agricultural income from both commodities, claiming there was manufacturing activity involved.
Where coffee is cured or hulled before being sold, manufacturing activity was involved and hence 25% of the income was to be taxed by the Centre.
Curing is a process by which raw coffee is converted to green beans ready for roasting. Substantial machinery and effort is involved but the actual cost of curing works out to about ₹2 per kg for a product worth about ₹200 per kg, or 1%. The Centre thus claimed the right to tax 25% of the agricultural income from coffee.
How did this lead to the end of single-origin coffees from India?
Rise of raw coffee
Once this legislation was enacted planters, started selling uncured coffee instead of cured coffee. The coffees were sold in raw coffee form which is a ‘bulk’ coffee. Soon, a vibrant, active, regular and credible market for raw coffee developed. Today, the farm gate prices are quoted mostly for raw coffee. When raw coffee is traded, the criteria looked at is moisture content, appearance and outturns, not so much the cup taste. Overnight, the charm of producing a fine cup disappeared.
Good bulks at the least cost of production became the norm. The coffee was then bought by curers, exporters and domestic roasters, who cured, graded and bulked the coffee according to customer requirements. In the process, the origin of the coffee got lost.
The production of fine coffees takes a lot of effort; while the extra input and efforts are certain, the rewards are uncertain. There is a considerable marketing effort involved and the price realisations are uncertain.
In such a scenario, most growers will be reluctant to pursue fine coffees when they know that they fall within the jurisdiction of an income tax officer.
Though today there is no agricultural income tax, central income tax can also be avoided. As a result, one finds that most of the fine coffee awards are won by corporates, who have the administrative capacity to deal with the extra headaches.
Just before the enactment of the rule 7B, pooling of coffee was abolished and free open market sales began. The first coffee auctions were opened for growers. This was an opportunity to sell their coffees after curing in the name of the estate and an opportunity for buyers to buy single-origin coffees.
It was the ideal platform for promoting single-origin coffees. Then came Rule 7B and the sellers disappeared. The auctions never recovered from this setback.
Low-hanging fruit
The Finance Minister often talks of reducing complexity in income tax rules; deleting this rule is one of the easiest steps he can take.
Using an appropriate cliché, it is “one of the lowest hanging fruits” he is ever likely to find. This is a rule that brings little revenue, may be even no revenue, but destroys a beautiful business. We hope he picks this ripe coffee cherry at the earliest.
And, if he is a coffee drinker himself, he will find he has many fine single-origin coffees from India to choose from.
(The writer is a coffee planter with an interest in financial markets and agricultural development)
