[Opinion] Finance Bill 2023 – Cooperative Societies

Authored by Amit K and Jinesh Lalwani | CA

Table of Contents

1. Governance of the Cooperative Societies

2. Budget 2023 proposals for Cooperative Societies

3. Key Takeaway

India being a global agricultural powerhouse, has always encouraged the cooperative society architecture in bringing down the exploitation of producers/farmers and eradicating poverty. A cooperative society is a people’s institution to enhance the economic and social betterment of its members based on self-help and mutual aid.

The Government has extended their constant support in safeguarding the rights of producers and consumers of the rural areas. Encouraging the cooperative framework of doing the business by providing infrastructure and tax benefits to cooperative societies is one such step.

1. Governance of the Cooperative Societies

The history of cooperative society can be tied back to 1904, when first law for Cooperative Society was enacted for governance and administration of the formation of the cooperative societies in India. This was superseded by Cooperative Societies Act, 1912. Thereafter, various cooperative committees were formed for better governance considering the nature and objective of the cooperative societies being formed.

The Multi-Unit Cooperative Societies Act, 1942 was enacted to govern the Cooperative Societies established in more than one state. It was superseded by The Muti-State Cooperative Societies Act, 1984 which was again modified in 2002. The Act encouraged formation of various multi-state cooperative societies which has been aid for the low-income groups all over India for raising credits at lower interest rates, paving way to the larger market with minimal cost and other administrative support.

In 2021, the Government has formed a vision “Sahakar se Samriddhi” (prosperity through cooperation) and taken several steps to strengthen India’s cooperative architecture. The Union Ministry of Cooperation was formed to realise the vision, streamline process for ease of doing business for a cooperative society, provide a separate administrative and legal framework to the cooperative businesses.

In 2022, the Government has planned to formulate a new National Cooperation Policy for bringing transparency, modernization, and competitiveness in India’s cooperative businesses.

In budget speech on 1^st February 2023, the Hon’ble Finance Minister (“FM”) has stated the inclusive growth as one of the Saptarishi for this Amrit Kaal Budget. Co-operative societies are one of the important pillars for an inclusive growth of India.

2. Budget 2023 proposals for Cooperative Societies

2.1 Administrative reforms

The FM has conceded that the Government is promoting cooperative based economic development model.

The budget proposes the following:

• Enhancing the scope of services of Primary Agricultural Credit Societies (‘PACS’), a village/panchayat level multi-state cooperative society engaged in providing credit facilities to its members, to a multi-purpose cooperative society per se providing other services apart from financial assistance.
• Facilitate setting up of multipurpose cooperative societies in uncovered panchayats and villages in next five years.
• Incorporating a national cooperative database for country wide mapping of cooperative societies.
• Implement decentralized storage capacity for the farmers.

The above proposals/actions of the Government should help the villagers to get a nationwide financial, administrative and marketing support. The farmers shall be able to store their produce in multiple location across the country and realize remunerative prices through sale at appropriate times. The digitalization and centralization would result in a more robust and transparent administration of the cooperative societies.

2.2 Income-tax Proposals

2.2.1 Ease of banking

As a measure to curb black money, Government introduced Section 269SS, 269T, 271D and 271E in Income-tax Act,1961 (“IT Act”), where extending loan/deposits and repayments beyond twenty thousand in cash were penalized. In the budget 2023, it is proposed to extend the limit to two lakhs for the PACS and Primary Cooperative Agriculture & Rural Development Banks.

Finance Act, 2020 introduced section 194N for deduction of tax at source by the banking businesses if the cash withdrawals exceed rupees one crore. It is proposed to enhance the limit to rupees three crores for the Cooperative Societies.

The proposition is a decent step to facilitate ease of doing business for the rural inhabitants who find it difficult to understand the modern banking. The amendment should encourage the farmers to slowly familiarize with the banking industry and reduce cash transactions over the period.

2.2.2 Concessional tax rates for manufacturing cooperative societies

After the amendments in Finance Act, 2020, the cooperative societies have an option to tax the income at (i) prescribed slab rates with Alternate Minimum Tax u/s 115JC of the IT Act or (ii) concessional tax rate of 22% u/s 115BAD of the IT Act provided the prescribed exemptions and deductions including deduction u/s 80P of the IT Act are foregone.

Until now the focus was majorly on the cooperative societies established for soothing the businesses of the agro-industries. But this time, a remarkable change is proposed in the budget wherein a shift in focus can be seen in making the Indian economy a more cooperative economy. The budget proposes to introduce section 115BAE enforcing a concessional tax rate of 15% for the cooperative society registered after 1^st April 2023 and commenced manufacturing before 31^st March 2024. This could be a fabulous opportunity for the low-income group people to associate for sharing the resources and manufacturing articles at more economical cost.

While the proposed amendment of the reduced tax rate would enable various manufacturers to collaborate for the economic benefits, it is also ensured that any unreasonable benefit is not availed through trading of goods or exchanging services with any close connections to the cooperative society. Hence, the budget proposes to amend the provisions relating to specified domestic transactions u/s 92BA of the IT Act to include transactions between cooperative society and the other person in its close connection.

2.2.3 Relief to Sugar Cooperatives from past Tax Demands

The cooperative sugar factories used to pay excess price for the sugar cane than the Statutory Minimum Price (“SMP”) fixed under Sugarcane Control Order, 1996 and claim the excess price as deduction. This resulted in tax litigation, wherein the officers disallowed the excess claim considering it as appropriation of profits.

Later, Finance Act, 2015 introduced clause (xvii) in sub-section (1) of section 36 of the IT Act allowing the cooperative sugar factories to claim deduction of the amount paid for purchase of sugarcane which is equal to or less than the price fixed by or fixed with the approval of the Government, which may be higher than the SMP. It being prospective amendment, the pending demand and litigations persisted for the prior years.

Therefore, to conclude the matter, the budget 2023 proposes to extend the above-mentioned benefit to the Financial Years including and prior to 2014-15. Accordingly, a new sub-section 19 is proposed to be introduced in section 155 of the IT Act, allowing the cooperative sugar factories to claim deduction of the disallowed excess expenditure to the extent approved by the Government. The deduction can be claimed by filing an application for rectification with the Assessing Officer. The corresponding amendment has also been proposed in section 154 of the IT Act, for rectification of mistake, to reckon the period of four years from 1^st April 2022.

3. Key Takeaway

The concept of cooperative society would be a great endeavor for the agricultural producers and also the thrilling youth engaging in exciting new businesses. The government reforms and polices for cooperative societies have been overwhelming and are expected to liberalize further. While the new tax proposals are good start, a more accelerating promotion of the cooperative architecture with policies facilitating the ease of doing business would create a complete echo system to encourage new businesses.