Mandi Taxes, RDF, APMCs and Mandi Board in Punjab 1: Myths and Reality
(In the context of Government of India reducing Mandi (agriculture market) tax to 2% and Rural Development Fund to zero for wheat procurement 2023, and Punjab Government contemplating legal action for the pending RDF payment of Rs 2,872 crores from three previous procurement seasons, this three-part series analyses evolution of agriculture marketing taxes, quality of expenditures, capture of Agriculture Produce Market Committees by Punjab’s elite, and loan repayment default by Punjab Mandi Board, once the-richest-Public-Sector- Undertaking of Punjab)
Punjab has 150 Agriculture Produce Market Committees (APMCs). Each APMC has one main agriculture market, some sub-yards, and several temporary wheat and paddy procurement centres. At the apex level, agriculture marketing operations are managed by Punjab Mandi Board (PMB). High yields and assured paddy and wheat procurement at minimum support price (MSP) by Government of India (GoI) through Food Corporation of India (FCI) since 1967 have considerably expanded Mandi operations.
TAX STRUCTURE
Arhtiya commission, market development fund (MDF), rural development fund (RDF), infrastructure fund and purchase tax have been levied by Punjab Govt. (GoP) from time to time.
Arhtiya commission: About 28,000 registered Arhtiyas (commission agents) are an integral part of agriculture marketing system in Punjab. They are intermediaries between producers and buyers, and an important source of credit, agriculture inputs and groceries for the farmers through interlocking transactions. Many own rice shellers. Arhtiyas were paid 1.5% of purchase price as commission which was raised to 2.0% in 1988 and 2.5% in 1998. As wheat MSP and quantity procured increased, total commission paid in 2022 was more than 180-folds the amount paid in 1967. The increase for paddy was higher. What was the justification to raise the fee by additional 67% when it automatically increased with annual raise in MSP?
Arhtiyas are a strong lobby and an important source of funding for political parties. After dilly dallying for several years, the GoP reluctantly agreed to direct payment to famers bypassing Arhtiyas in 2021 when GoI firmly put its foot down. Other examples of Arhtiya influence include: (i) in Rabi Marketing Season 2023, Arhtiyas were paid Rs 45 crore without doing anything as farmers directly brought 8.5 lakh tonne wheat from their farms to bulk-handling modern silos; (ii) abandoning the proposal capping interest rate at 15% per annum on non-institutional loans taken by farmers; and (iii) not pursuing the proposal for establishing Price Stabilization Fund to compensate farmers for harvest-time price decline (like mustard in 2023) by reducing Arhtiya fee to 2%.
Mandi and rural development funds: Punjab initially charged 2% mandi development fee (MDF), raising it to 3% around 2014. With the establishment of Rural Development Board, it started levying 2% RDF in 1987 and raised it to 3%. No other state, except Haryana, levies RDF. Both the MDF and RDF are practically managed by PMB.
Infrastructure tax: Initially, 1% infrastructure tax was levied which was raised to 2% around 2014. Phased out under GST regime, it was used for developing infrastructure in rural areas.
Purchase tax: At the start of MSP operations, 1% purchase tax was levied. Subsequently raised to 4%, it was also phased out under GST regime.
TRAJECTORY OF MANDI TAXES
In 1967 total taxes were 4.5%. Increases around 1987 and 1998 raised these to 11.5%. Around 2014, these were again jacked up to exorbitant 14.5% to show inflated tax collections to justify higher entitlement under GST regime. It is doubtful the GoI paid the escalated 3% tax. With the implementation of GST, present 8.5% rate is highest in the country. Except Haryana, other states like Gujarat, MP, UP, Maharashtra and Rajasthan levy only 2–3% Mandi tax. Transportation costs from Punjab are also high due to exorbitant rates charged by truck unions.
WHO PAYS MANDI TAXES
Theoretically, the buyer pays Mandi taxes. The GoI purchases wheat and paddy for the Public Distribution System at MSP and pays these taxes over and above the MSP. As MSP for other crops is not enforced, private traders usually bid a lower price factoring-in these taxes and other costs incurred by them. Except for paddy and wheat, Punjab’s high taxes are indirectly borne by farmers. These are a deterrent against diversification from rice-wheat cycle and a hindrance in the development of farmer producer organisations.
We had flagged high Mandi taxes in 2003 (India: Revitalizing Punjab’s Agriculture. World Bank Report No 37069), which are essentially transfer of public funds from GoI to GoP, but the State Govt. did not take any remedial action.
WHO GETS MANDI TAXES
Arhtiya commission goes to Arhtiyas. Mandi tax goes to PMB/APMCs. RDF goes to Rural Development Board (RDB). Infrastructure fund was used by Infrastructure Development Board. Only the purchase tax (discontinued since 2017) was received by Punjab treasury and spent through the state budgetary process.
The RDF and MDF are managed by PMB/RDB. By design, these are kept out of state budget to avoid scrutiny by the Comptroller and Auditor General. Except for some broad goals, objective, transparent and independently verifiable criteria, and norms were never established and publicised for fair allocation and effective utilization of RDF and MDF. During Punjab’s era of good governance to about 1985, these were, by and large, effectively used for the intended public-good purposes. During the last more than two decades these have been increasingly used for vote bank politics by the successive governments.
ELITE-CAPTURE OF APMCs AND MANDI BOARD
During formative years, the APMCs were democratic elected entities. Several elected members of APMCs — e.g., Sardar Sukhdev Singh Dhindsa — subsequently became MLAs and ministers. Unlike APMCs in Maharashtra, Karnataka, and Gujarat, no APMC elections have been held in Punjab since 1970s. The APMCs are headed by appointees from the political families. During government transition, these are headed by sub-divisional magistrates. Mandi Board Chairman, vice-chairmen, and non-official members are also ruling party politicians. At least two PMB Chairmen or their family members were Arhtiyas. Similarly, many APMC chairmen or their family members/close relatives were Arhtiyas at some stage. Obviously, their interests appear to be aligned with the traders or respective political parties. By insulating APMCs and Mandi Board from the electoral process, Punjab has turned APMCs and PMB into insular inward-looking organisations with little accountability to farmers and other stakeholders. This is reflected in the deteriorating quality of RDF and MDF expenditures (Details in next blog).
