VC investors in food sector may get pass-through status

NEW DELHI: The food processing industry may be in for a pleasant surprise in Budget 2008. The finance ministry is considering restoring the pass-through status for venture capital funds investing in the food processing industry and infrastructure facilities, such as cold chains and warehouses, to give a leg-up to the sector.

Development of the farm sector weighs heavy on the UPA government’s agenda. Building up food processing and cold chain infrastructure holds the key to development of farm sector in the country.

According to industry estimates, the lack of cold chains in the country leads to wastage of about 40% of the farm produce, causing a loss of about Rs 75,000 crore annually.

VC funds enjoyed the pass-through benefit on their investments across all sectors till the last budget. The pass-through status allows earnings of VC funds to be exempted from taxes.

However, the trustees who form the fund pay a tax on the income earned through the fund. Last year finance minister P Chidambaram decided to do away with this exemption except for a few sectors like biotechnology and nanotechnology. This did not go down well with VC funds which have played a significant role in the development of the industry.

The government consequently restored the benefit only for those VC funds which invested in infrastructure sectors enjoying a tax holiday under section 80(I)(A). These include roads, highway projects, water supply projects, irrigation projects, solid waste management systems, ports and airports. However, cold chains covered under a separate section, 80(I)(B) of the Act, did not qualify for this exemption.

The VC funds operating in biotechnology, information technology relating to hardware and software development, nanotechnology, seed research and development, R&D of new chemical entities, dairy industry, poultry industry, investments in hotel-cum-convention centres and production of biofuels were given the pass through benefit in the last budget.