Sustaining Farmer Collectives Beyond the Tax-Holiday: Policy Options for India’s FPOs

Articles

1. Background: FPOs and Cooperatives in India

Farmer Producer Organisations (FPOs) and cooperatives are collective enterprises of small and marginal farmers that seek to improve their bargaining power, lower transaction costs, and strengthen their access to markets, credit, and technology.

  • Cooperatives: Registered under the Cooperative Societies Act and state-level acts, these institutions have long played a welfare role but often face politicisation and bureaucratic control.
  • FPOs (Producer Companies): Introduced under the Companies (Amendment) Act, 2002, this hybrid model combines cooperative values with corporate governance, aiming to make farmer collectives self-sustaining, market-oriented, and professionally managed.

2. Income Tax Rules and Fiscal Incentives

To promote FPOs, the Finance Act 2018 inserted Section 80PA in the Income-tax Act 1961, granting a 100% tax deduction to registered Producer Companies (turnover ≤ ₹100 crore) for a period of five assessment years beginning 1 April 2019.

Eligible Activities

  • Marketing agricultural produce of members
  • Purchase of inputs, implements, or seeds for members
  • Processing of members’ produce

The window covered Assessment Years 2019-20 to 2024-25 (corresponding to Financial Years 2018-19 to 2024-25). The deduction expires for Assessment Year 2025-26 onward (FY 2025-26) unless extended by government.

3. Expiry of 80PA in March 2025 and Its Implications

From 1 April 2025, FPOs will no longer be eligible for the 100% tax deduction on business profits under Section 80PA. This shift carries wide-ranging implications:

  1. Increased Tax Liability – FPOs now fall under regular corporate tax rates (25–30%) after the deduction expires.
  2. Reduced Surplus for Reinvestment – Profits earlier reinvested into infrastructure or capacity building will shrink.
  3. Impact on Member Benefits – The ability to offer lower input costs or higher procurement prices will be constrained.
  4. Competitive Disadvantage vs. Cooperatives – Cooperatives still enjoy certain exemptions under Section 80P, creating imbalance.
  5. Sustainability Risks – Many FPOs still rely on grant-based support; without fiscal cushioning, some may become inactive.
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4. Comparative Overview: Tax Treatment Pre- and Post-March 2025

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5. Projected Financial Impact for a Typical FPO

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6. Policy Challenges

  • Compliance Burden: Companies Act requirements for producer companies are as stringent as private firms.
  • Access to Finance: Limited creditworthiness restricts leverage.
  • Capacity Deficit: Many FPOs lack managerial and accounting skills to manage taxation and compliance.
  • Unequal Playing Field: Cooperatives enjoy continued tax relief under Section 80P, whereas FPOs lose parity.

7. Policy Recommendations

  1. Extend or Renew Section 80PA
  2. Introduce a New “FPO Reinvestment Deduction”
  3. Parity with Cooperatives
  4. Transitional Support
  5. Ease Compliance Burden
  6. Integrated Policy Support
  7. Performance-Linked Tax Benefits

8. Conclusion

The expiry of the five-year income tax exemption under Section 80PA in March 2025 marks a critical turning point for India’s FPO movement. Without fiscal continuity, many FPOs could face severe financial stress, undermining the government’s objective of doubling farmers’ income and promoting collective entrepreneurship.

A balanced approach—extending incentives while demanding reinvestment and accountability—is essential. Tax policy must evolve from temporary relief to long-term viability, ensuring FPOs remain a transformative vehicle for rural economic growth.