In a move that would reduce the tax liability of cash-strapped sugar cooperatives in the wake of the pandemic, the government has made it clear that the high state-advised price (SAP) that these entities pay farmers to purchase sugarcane will be allowed as a deduction under income tax rules.
Currently, the deduction of expenses for sugar cooperatives from income is calculated only on the basis of the Fair and Equivalent Price (FRP) set by the Centre, which is usually lower than the Standard Rates (SAP) set by the various countries in their territories. .
In a prospectus dated October 25, the Central Board of Direct Taxes (CBDT) explained that “price fixing by state governments through state laws/orders or other legal instruments regulating the purchase price of sugarcane, including the state recommended price , which may be higher than the legal minimum fair and equivalent rate/price set by the Central Government” will be considered for deduction. However, it is not clear whether the government will return the additional taxes collected so far on this account since this provision was included in the income tax law in 2016.
The break comes after a BJP delegation from Maharashtra, led by former Prime Minister Devendra Fadnavis, met with Union Home and Cooperation Minister Amit Shah last week to highlight the issue.
Sugar cooperatives seek relief on the grounds that payments to farmers in addition to the FRP should not be construed as a distribution of profits among their members (usually farmers); Instead, it should be considered an expense deductible from income.
Usually, cooperatives in Maharashtra pay FRP to farmers initially for their sugarcane supply. However, they pay more for cane sugar later if they earn more sugar and other by-product business. They argue that this is not a profit.
In other states like Uttar Pradesh, the traditional epicenter of the sugarcane arrears crisis, cooperatives have been tasked with paying farmers’ SAP. SAP at UP stood at Rs 340 per quintal for the current marketing year starting 1 October, compared to FRP of Rs 290.
The Finance Act 2015 incorporated Clause (xvii) I into Subsection (1) of Section 36 of the Income Tax Act 1961, to provide a discount to sugar cooperatives based on an FRP (or lower amount).