Recently, the Ministry of Agriculture released a draft Model Contract Farming Act, 2018. The draft Model Act seeks to create a regulatory and policy framework for contract farming. Based on this draft Model Act, legislatures of states can enact a law on contract farming as contracts fall under the Concurrent List of the Constitution. In this context, we discuss contract farming, issues related to it, and progress so far.
What is contract farming?
Under contract farming, agricultural production (including livestock and poultry) can be carried out based on a pre-harvest agreement between buyers (such as food processing units and exporters), and producers (farmers or farmer organisations). The producer can sell the agricultural produce at a specific price in the future to the buyer as per the agreement. Under contract farming, the producer can reduce the risk of fluctuating market price and demand. The buyer can reduce the risk of non-availability of quality produce.
Under the draft Model Act, the producer can get support from the buyer for improving production through inputs (such as technology, pre-harvest and post-harvest infrastructure) as per the agreement. However, the buyer cannot raise a permanent structure on the producer’s land. Rights or title ownership of the producer’s land cannot be transferred to the buyer.
What is the existing regulatory structure?
Currently, contract farming requires registration with the Agricultural Produce Marketing Committee (APMC) in few states. This means that contractual agreements are recorded with the APMCs which can also resolve disputes arising out of these contracts. Further, market fees and levies are paid to the APMC to undertake contract farming. The Model APMC Act, 2003 provided for contract farming and was released to the states for them to use this as reference while enacting their respective laws. Consequently, 20 states have amended their APMC Acts to provide for contract farming, while Punjab has a separate law on contract farming. However, only 14 states notified rules related to contract farming, as of October 2016.
What are the issues with the current structure, and how does the draft Model Act seek to address them?
Over the years, expert bodies have identified issues related to the implementation of contract farming. These include: (i) role of APMCs which are designated as an authority for registration and dispute settlement in most states, (ii) provisions of stockholding limits on produce under contract farming, and (iii) poor publicity of contract farming among the farmers about its benefits.
Role of Agricultural Produce Marketing Committees/Marketing Boards
The NITI Aayog observed that market fees and other levies are paid to the APMC for contract framing when no services such as market facilities and infrastructure are rendered by them. In this context, the Committee of State Ministers on Agricultural Reforms recommended that contract farming should be out of the ambit of APMCs. Instead, an independent regulatory authority must be brought in to disengage contract farming stakeholders from the existing APMCs.
In this regard, as per the draft Model Act, contract farming will be outside the ambit of the state APMCs. This implies that buyers need not pay market fee and commission charges to these APMCs to undertake contract farming. Further, the draft Model Act provides for establishing a state-level Contract Farming (Promotion and Facilitation) Authority to ensure implementation of the draft Model Act. Functions of the Authority include (i) levying and collecting facilitation fees, (ii) disposing appeals related to disputes under the draft Model Act, and (iii) publicising contract farming. Further, the sale and purchase of contracted produce is out of the ambit of regulation of the respective state/UT Agricultural Marketing Act.
Registration and agreement recording
The Model APMC Act, 2003 released to the states provides for the registration of contract farming agreements by an APMC. This was done to safeguard the interests of the producer and the buyerthrough legal support, including dispute resolution. The procedures for registration and recording of agreements vary across states. Currently, registration for contract farming has been provided with the APMC in few states, and with a state-level nodal agency in others. Further, market fee on purchases under contract agreements is completely exempted in few states and partially exempted in others. The Committee of State Ministers on Agricultural Reforms recommended that a instead of a APMC, district-level authorities can be set-up for registration of contract farming agreements. Further, any registering authority should verify the details such as the financial status of the buyer.
Under the draft Model Act, every agreement should be registered with a Registering and Agreement Recording Committee, which will be set up consisting of officials from departments such as agriculture, animal husbandry, marketing, and rural development. Such a Committee can be set up at the district, taluka or block levels.
Disputes between the producer and the buyer
The Ministry of Agriculture and Farmers Welfare observed certain risks related to upholding the contract farming agreement. For example, producers may sell their produce to a buyer other than the one with whom they hold a contract. On the other side, a buyer may fail to buy products at the agreed prices or in the agreed quantities, or arbitrarily downgrade produce quality. The Committee of State Ministers on Agricultural Reforms recommended that dispute redressal mechanism should be at block, district or regional-level state authorities and not with an APMC.
Under the draft Model Act, in case of disputes between a producer and a buyer, they can: (i) reach a mutually acceptable solution through negotiation or conciliation, (ii) refer the dispute to a dispute settlement officer designated by the state government, and (iii) appeal to the Contract Farming (Promotion and Facilitation) Authority (to be established in each state) in case they are not satisfied by the decision of the dispute settlement officer.
Stockholdings limits on contracted produce
Stockholding limits are imposed through control orders as per the Essential Commodities Act, 1955. Such provisions of stockholding limits can be restrictive and discourage buyers to enter into contracts. It was recommended that the buyers can be exempted from stock limits up to six months of their requirement in the interest of trade. Under the draft Model Act, limits of stockholding of agricultural produce will not be applicable on produce purchased under contract farming.
Other recommendations
While contract farming seeks to provide alternative marketing channels and better price realisation to farmers, several other marketing reforms have been suggested by experts in this regard. These include: (i) allowing direct sale of produce by farmers, (ii) removing fruits and vegetables out of the ambit of APMCs, and (iii) setting-up of farmer-consumer markets, (iv) electronic trading, and (v) joining electronic National Agricultural Market for the sale of produce.
The Finance Bill, 2017 is being discussed in Lok Sabha today. Generally, the Finance Bill is passed as a Money Bill since it gives effect to tax changes proposed in the Union Budget. A Money Bill is defined in Article 110 of the Constitution as one which only contains provisions related to taxation, borrowings by the government, or expenditure from Consolidated Fund of India. A Money Bill only needs the approval of Lok Sabha, and is sent to Rajya Sabha for its recommendations. It is deemed to be passed by Rajya Sabha if it does not pass the Bill within 14 calendar days.
In addition to tax changes, the Finance Bill, 2017 proposes to amend several laws such the Securities Exchange Board of India Act, 1992 and the Payment and Settlements Act, 2007 to make structural changes such as creating a payments regulator and changing the composition of the Securities Appellate Tribunal. This week, some amendments to the Finance Bill were circulated. We discuss the provisions of the Bill, and the proposed amendments.
Certain Tribunals to be replaced
Amendments to the Finance Bill seek to replace certain Tribunals and transfer their functions to existing Tribunals. The rationale behind replacing these Tribunals is unclear. For example, the Telecom Disputes Settlement and Appellate Tribunal (TDSAT) will replace the Airports Economic Regulatory Authority Appellate Tribunal. It is unclear if TDSAT, which primarily deals with issues related to telecom disputes, will have the expertise to adjudicate matters related to the pricing of airport services. Similarly, it is unclear if the National Company Law Appellate Tribunal, which will replace the Competition Appellate Tribunal, will have the expertise to deal with matters related to anti-competitive practices.
Terms of service of Tribunal members to be determined by central government
The amendments propose that the central government may make rules to provide for the terms of service including appointments, term of office, salaries and allowances, and removal for Chairpersons and other members of Tribunals, Appellate Tribunals and other authorities. The amendments also cap the age of retirement for Chairpersons and Vice-Chairpersons. Currently, these terms are specified in the laws establishing these Tribunals.
One may argue that allowing the government to determine the appointment, reappointment and removal of members could affect the independent functioning of the Tribunals. There could be conflict of interest if the government were to be a litigant before a Tribunal as well as determine the appointment of its members and presiding officers.
The Supreme Court in 2014, while examining a case related to the National Tax Tribunal, had held that Appellate Tribunals have similar powers and functions as that of High Courts, and hence matters related to their members’ appointment and reappointment must be free from executive involvement.[i] The list of Tribunals under this amendment includes several Tribunals before which the central government could be a party to disputes, such as those related to income tax, railways, administrative matters, and the armed forces Tribunal.
Note that a Bill to establish uniform conditions of service for the chairpersons and members of some Tribunals has been pending in Parliament since 2014.
Inclusion of technical members in the Securities Appellate Tribunal
The composition of the Securities Appellate Tribunal established under the SEBI Act is being changed by the Finance Bill. Currently, the Tribunal consists of a Presiding Officer and two other members appointed by the central government. This composition is to be changed to: a Presiding Officer, and a number of judicial and technical members, as notified by the central government.
Creation of a Payments Regulatory Board
Recently, the Ratan Watal Committee under the Finance Ministry had recommended creating a statutory Payments Regulatory Board to oversee the payments systems in light of increase in digital payments. The Finance Bill, 2017 seeks to give effect to this recommendation by creating a Payments Regulatory Board chaired by the RBI Governor and including members nominated by the central government. This Board will replace the existing Board for Regulation and Supervision of Payment and Settlement Systems.
Political funding
The Finance Bill, 2017 proposes to make changes related to how donations may be made to political parties, and maintaining the anonymity of donors.
Currently, for donations below Rs 20,000, details of donors do not have to be disclosed by political parties. Further, there are no restrictions on the amount of cash donations that may be received by political parties from a person. The Finance Bill has proposed to set this limit at Rs 2,000. The Bill also introduces a new mode of donating to political parties, i.e. through electoral bonds. These bonds will be issued by banks, which may be bought through cheque or electronic means. The only difference between cheque payment (above Rs 20,000) and electoral bonds may be that the identity of the donor will be anonymous in the case of electoral bonds.
Regarding donations by companies to political parties, the proposed amendments to the Finance Bill remove the: (i) existing limit of contributions that a company may make to political parties which currently is 7.5% of net profit of the last three financial years, (ii) requirement of a company to disclose the name of the parties to which a contribution has been made. In addition, the Bill also proposes that contributions to parties will have to be made only through a cheque, bank draft, electronic means, or any other instrument notified by the central government.
Aadhaar mandatory for PAN and Income Tax
Amendments to the Finance Bill, 2017 make it mandatory for every person to quote their Aadhaar number after July 1, 2017 when: (i) applying for a Permanent Account Number (PAN), or (ii) filing their Income Tax returns. Persons who do not have an Aadhaar will be required to quote their Aadhaar enrolment number indicating that an application to obtain Aadhaar has been filed.
Every person holding a PAN on July 1, 2017 will be required to provide the authorities with his Aadhaar number by a date and in a manner notified by the central government. Failure to provide this number would result in the PAN being invalidated.
The Finance Bill, 2017 is making structural changes to some laws. Parliamentary committees allow for a forum for detailed scrutiny, deliberations and public consultation on proposed laws. The opportunity to build rigour into the law-making process is lost if such legislative changes are not examined by committees
[i] Madras Bar Association vs. Union of India, Transfer Case No. 150 of 2006, Supreme Court of India, September 25, 2014 (para 89).
