Prafull Goradia: Tea under the hammer

Making auctions compulsory will be a retrograde step

According to the recommendations of a recent report on the tea industry by the commerce ministry of the West Bengal government, it should be made compulsory for tea estates to auction the surplus tea left after exports and packaging for domestic consumer markets.

The stated objective is to ensure transparency in the tea market. The report claims that the recommendations conforms to the views of tea brokers. This is not true.

Hundreds of brokers who are not auctioneers would go out of business as soon as the sale of tea surplus by auction becomes compulsory.

Moreover, not all auctioneers subscribe to the view conveyed by the report. For example, my company (Contemporary Brokers Private Limited), which enjoys about 20 per cent market share in Kolkata and Siliguri tea auctions, was never consulted.

My company has always held the view that no restrictions should be placed on the freedom of the tea producer to sell to his produce. Any system that lives by or depends on a compulsion or a monopoly is unlikely to endure. A producer must be allowed to freely compete with other modes of sale. He must make his offerings more attractive on a continuous basis in order to compete.

The presumption that the auction system is transparent is only partially justified. Between the buyers and the sellers, the system is one-sided. The details of the supply are declared every week in the printed catalogues distributed by the auctioneers. The demand, however, remains undisclosed until the last minute.

Until one or more buyers bid on large amounts of tea, the demand remains unrevealed. The seller offers details about his produce in the catalogues and he cannot go against the printed information. But as far as the buyer is concerned, there is no commitment from him that the offerings would be sold.

There is no doubt about the transparency of price at which each lot of tea offering is sold. The seller cannot under-voice his produce. One may assume that there might be a few sellers who would like to under-voice for the sake of individual gain. But such sellers do not comprise more than a tiny minority in terms of production.

Therefore, there is no reason to impose a blanket restriction on the mode of sale for the entire industry. Why restrict all sheep in order to pre-empt a few black sheep from being black from time to time?

The next question is: why would a seller under-voice? The obvious answer is to evade income and sales tax. To check and prevent such mischief is the job of the income-tax department. Why should the tea trade alter its sale methods to prevent some suspected tax evasion on the periphery.

Tea production is essentially a farming practice. A part of the produce comes from plantations and a part of it from individual farmers. There are many small growers in south as well as north India. There are growers who own no more than a hectare, on which they plant tea.

Why then is tea not treated like any other agricultural crop? There are no taxes "" income, sales or excise duty "" on agricultural crops. There should have been none on tea. But the British colonial government believed in taxing whatever sector it could.

Every farmer had to pay land revenue on every bigha he owned. This revenue was the single largest source of income for the provinces during the British rule.

All the has changed since we attained Independence. What has remained unchanged is the treatment towards tea estates. The discrimination against tea estates began as result of the Government of India Act, 1935, when income tax on agriculture was introduced in the provinces.

Tea began to be called an industry and 40 per cent of its profits were brought under the Central income tax law. The provinces were encouraged to have a similar tax on 60 per cent of the total profit from a tea garden.

The first province to levy income tax was Assam in 1939. In 1992, Finance Minister Manmohan Singh tried correcting this colonial anomaly by abolishing all excise duty on tea. But the next finance minister put the clock back.

Restrictive trade practices have for long resulted in a controlled or a guided economy. Since 1991, the government has introduced various reforms under its liberalisation policy. At this stage, 13 years later, to think of making tea auctions compulsory is a retrograde step.

On the contrary, the policy approach must be to provide greater freedom to tea producers to operate, so that they can innovate new ways to market their produce.

The practice of tea auctions in India started back in 1861 or 143 years ago. If there is a crisis today, it is due to an insufficiency of change and not the other way round.