GENERAL INDUSTRY BACKGROUND

India has witnessed a sharp growth in the Food and Beverage Industry (F&B Industry) over the past few years, with food production expected to double by 2020. The entry of multinationals, the aggressive rise of commodity branding, an opening up of the retail sector, increase in local players and the low cost of technology is changing the economics of the food industry.1

The F&B Industry can be, broadly, classified as covering three major sectors - Farming, Processing & Distribution.

A. Farming: It is involved in the production and collection of raw agricultural commodities such as rice, wheat and corn. Examples include seed producers such as Astha Beej Co. Pvt. Ltd, Raasi Seeds, Century Seeds and agribusiness such as DuPont India.

B. Food processing: It is an integral part of the value chain and involves the processing of raw food commodities into forms that can be easily distributed and sold to consumers. This sector has diversified into the following branches:

  1. Food: e.g. Kellogg Company
  2. Beverages (Alcoholic & Non-Alcoholic): e.g. Coca-Cola Company, Pepsi Co.
  3. iConfectioneries: e.g. Cadbury, Nestle

C. Distribution: It is the final stage of the F&B Industry value chain and entails the distribution of finished or near-finished food products to consumers. This industry includes:

  1. Grocers/Supermarkets: These provide processed but unprepared food to customers, e.g. Spencers, Star Bazaar.
  2. Quick Service Restaurants: These fast food restaurants serve ready-to-eat food, e.g., KFC, McDonalds, Taco Bell.
  3. Casual & Upscale Restaurants: They serve full meals to consumers, e.g. Bristol Bar & Grill.

The processed food industry is one of the largest in India and is ranked fifth in terms of export, expected growth, production and consumption.2 The industry is growing at a compound annual growth rate (CAGR) of 15 to 20 percent and is likely to touch $30 billion by 2015.3 The country is also the top producer of milk, pulses, ginger, bananas, mango and papayas, and the second largest producer of rice, wheat, vegetable and horticulture products.4

Sensing the potential of the Indian market, many international players have forayed into the market by making deals with the domestic players, for example Starbucks and Tata5. Many leading foreign brands are rapidly expanding and now have presence in many tier II and tier III cities.6 Domestic players like Haldiram’s are also gearing up for expansion through routes like franchising.7

IMPORTANT TRENDS IN THE INDUSTRY

  • Demand for consumer goods like ready-to-eat food products, juices, quick consumption products, and health food and drinks is on the rise.8
  • Heath supplements / health food is an evolving sub-sector in the industry gaining and is becoming popular between health conscious crowd.9
  • Increasing demand for takeaway and home delivery services.10
  • E-commerce sites moving towards online retail of F&B.11
  • Increase in foreign F&B companies entering India.12
  • Food processing industry has been declared as a priority sector.
  • Indian Government plans to set up 30 parks to develop clusters that provide the necessary infrastructure for food processing industries.13

MAJOR PLAYERS

  • Farming Sector: DuPont India, Rallies India Ltd., Nuziveedu Seeds Ltd., Advanta Limited, Monsanto India, Rasi Seeds, Godrej Agrovet Limited, National Agro Industries14
  • Food Processing: Nestle India, Parle Agro, Britannia Industries Limited, Cadbury India, Vadilal Industries Limited, Kwality Dairy India Limited15
  • Distribution: Star Bazaar, Spencer, Food World, D Mart, Bharti Retail, Auchan India, Total Superstore16
  • Food Companies Globally: Nestle, PepsiCo, The Coca-Cola Company, Danone, Tyson Foods, SABMiller, Unilever17

VARIOUS FOOD LAWS APPLICABLE TO FOOD AND RELATED PRODUCTS IN INDIA

1. Food Safety and Standards Act, 2006 (FSSA) and Rules, 2011 and Regulations, 2011.

  • The FSSA compels the licensing / registration of every single entity in the food business.
  • It carries elaborate regulations for labeling of food products and beverages. However, the Legal Metrology Act & Rules and Agmark regulations (mentioned below) are still operative.
  • FSSAI license number is required to be displayed on all food and beverage products.
  • It has created a new categorization for foods namely health supplements (such as nutraceuticals), foods for special dietary uses, novel foods, etc. and provides detailed regulations for each of the categories.
  • Standards and labeling requirements have been laid down for caffeinated beverages and packaged drinking water.
  • Establishment of food recall procedures have been made compulsory and it has been laid down that a recall plan must be submitted where applicable, along with the license application.
  • Food importers are required to obtain a license under the Act.

2. Legal Metrology Act, 2009

  • Manufacturing, packing, selling or importing any pre-packaged commodity is prohibited unless it is in standard quantity and carries all prescribed declarations.
  • Any advertisement mentioning the retail price of packaged commodity should also contain the net quantity thereof.
  • Un-verified weights or measures are liable to be forfeited by the State. Also, it is a punishable offence to sell, deliver or use any un-verified weight or measure.
  • Non-standard units are not permitted in any document, quotation, invoice, package or in any advertisements.

3. Legal Metrology (Packaged Commodities) Rules, 2011

  • It is illegal to manufacture, pack, sell, import, distribute, deliver, offer, expose or possess for sale any pre-packaged commodity unless the package is in such standard quantities or number and bears thereon such declarations and particulars in such a manner as may be prescribed.
  • It is required that any advertisement mentioning the retail sale price of a pre-packaged commodity shall also contain a declaration as to the net quantity or number of the commodity contained in the package.
  • It is punishable if any pre-packaged commodity is packed with error in net quantity beyond the limit prescribed in the Rules.
  • Declarations under the Act and Rules should be legible and prominent. For example, the Net Content and MRP must be very clear. The language has to be English or Hindi in Devnagari Script. Regional languages may be used in addition only and not as a replacement.
  • Genetically modified food products are now required to display the letters ‘GM’ on the principal display panel.

4. The Insecticide Act, 1968

  • Insecticides Act, 1968 has been specifically framed to ensure availability of quality, safe and efficacious pesticides to the agricultural community of India.
  • It defines the permissible amount and quality of pesticides that shall only be used for sustained growth of the plant.
  • Regulates the use of pesticides by the farming community.

5. Export (Quality Control and Inspection) Amendment Act, 1984

The Act facilitates export trade through quality control and inspection before the products are sold to international buyers.

6. Environment Protection Act, 1986

This Act incorporates rules for the manufacture, use, import and storage of hazardous microorganisms / substances / cells used as foodstuff.

7. Voluntary Standards

There are two organizations that deal with voluntary standardization and certification systems in the F&B Industry:

  • The Bureau of Indian Standards (BIS)
  • It formulates Indian standards in the processed food and beverages sector. BIS has, on record, standards for most of processed foods. These standards cover raw materials permitted and their quality parameters, hygienic conditions under which products are manufactured and packaging and labeling requirements.
  • Standards are implemented through promotion and through voluntary and third party certification systems
  • BIS has identified certain items like food colors/additives, vanaspati, and containers for packing, milk powder and condensed milk, for compulsory certification.
  • Through the Food Safety and Standards (Prohibition and Restriction on Sales) Regulations, 2011, certain products such as packaged drinking water have a mandatory BIS certification requirement.
  • Directorate of Marketing and Inspection (for “Agmark” Standards)
  • Directorate of Marketing and Inspection (DMI) enforces the Agricultural Products (Grading and Marketing) Act, 1937. Under this Act, Grade Standards are prescribed for agricultural and allied commodities. These are known as "Agmark" Standards.
  • Grading under the provisions of this Act is voluntary. Manufacturers who comply with the standards laid down by DMI are allowed to use "Agmark" labels on their products.

8. Cable Television Networks Rules, 1994 (Programme and Advertisement Code)

These Rules prohibit advertisements which promote, directly or indirectly, production, sale or consumption of -

  • Cigarettes, tobacco products, wine, alcohol, liquor or other intoxicants;
  • Infant milk substitutes, feeding bottles or infant food.

9. The Cigarettes and Other Tobacco Products (Prohibition of Advertisement and Regulation of Trade and Commerce, Production, Supply and Distribution) Act, 2003 (COTPA)

It is the principal comprehensive law governing tobacco control in India.

  • Direct advertising through many forms of mass media is prohibited, but tobacco companies still may advertise at the point of sale, subject to some restrictions.
  • Health warning labels are pictorial and text, cover 40 percent of the front panel of the package, and must be rotated every 24 months.

10. State-wise Regulatory laws governing the alcohol regime in India

Different states have different legislations that regulate the import, export, transport, manufacture, bottle, sale, purchase, use or consumption of potable alcohol. For instance, in the State of Maharashtra, The Bombay Prohibition Act, 1949 is the primary legislation that regulates potable alcohol. Sale of alcohol is prohibited in certain states such as Nagaland and Gujarat.

11. Shelf- life of imported food

At the time of import, food products are required to have a valid shelf life, or residual shelf life, of not less than 60 per cent of their original shelf life. This is mandated by a notification issued by Directorate General of Foreign Trade (DGFT), Ministry of Commerce & Industry.

12. The Infant Milk Substitutes, Feeding Bottles and Infant Foods (Regulation of Production, Supply and Distribution) Act, 1992 and The Infant Milk Substitutes, Feeding Bottles and Infant Foods (Regulation of Production, Supply and Distribution) Amendment Act, 2002

It prohibits advertisements and promotion of infant milk substitutes, feeding bottles, and infant foods.

TAX LAWS AFFECTING THE F INDUSTRY

1. Income Tax Act, 1961

  • It is tax on income imposed by the Central Government.
  • Residents in India are taxed on their worldwide income.
  • Non- residents are taxed on Indian source of income.
  • Income Tax rebate is allowed, 100% of profits for 5 years and 25% of profits for the next 5 years, for new industries to process, preserve and package fruits and vegetables.

2. Custom Duty

  • Custom duty is the indirect tax levied by the Central government on imports of machinery and/or goods from foreign countries.
  • Customs duty on import of food processing and packing machineries and their parts is chargeable in the range from 7.5% to 10%.
  • Customs duty on import of various types of alcohol ranges from 100% to 150% of the transaction value of imported alcohol, that is, the price actually paid or payable for the goods when sold for export to India for delivery at the time and place of import. Cigarrettes have a customs duty rate of 100%. Both cigarettes and alcohol are subject to Additional Customs Duty (ACD) and education cess. Customs duty on tobacco stands at Rs. 70 per kg.

3. Excise Duty

  • Central Excise duty is an indirect tax levied on those goods which are manufactured in India and are meant for home consumption.
  • Excise duty for the food and beverages sector ranges from 8% to 16%
  • Various fiscal incentives for the food processing sector have led to significant reduction in excise duty. Duty on condensed milk, ice cream, preparations of meat, fish and poultry, pectins and Pectates, used as a gelling agent in jams and jellies, pasta, yeast and biscuits whose retail price does not exceed Rs. 100 are now abolished.

4. Sales Tax / Value Added Tax (VAT)

  • Sales tax / VAT is levied by states on the sale of goods within its territory.
  • Central Sales Tax is applicable in case of the sale of goods in the course of inter-state trade or commerce.

5. CENVAT

  • Duty imposed by Central Government on the manufacture of goods.
  • No excise duty is levied on fruits and vegetable products but there is an excise duty levied on potable alcohol.
  • In generality the excise duty is 12% on the industry plus applicable cess.
  • Excise duty is now levied on condensed milk put up in unit containers, peanut butter and other specific goods.
  • Excise duty has increased for certain other items such as mineral water, aerated water, etc. to 18% from the existing 12%.
  • Excise duty has also been increased for tobacco products.

6. Service Tax

  • Under the current service tax regime, all services are taxable unless exempt.
  • The effective rate of service tax is 14% (including Education Cess).
  • Exempted services include: Services provided in relation to serving of food or beverages by a restaurant, eating joint or a mess, other than those having (i) the facility of air-conditioning or central air-heating in any part of the establishment, at any time during the year, and (ii) a license to serve alcoholic beverages.

1 http://www.fnbnews.com/redfr.asp?fn=/other/aboutus.asp&title=About%20Us (last accessed on Oct 21, 2014)

2 http://www.fnbnews.com/article/detnew.asp?articleid=36674&sectionid=2 (last accessed on Feb 28, 2015)

3 India's packaged food industry could touch $30 billion by 2015: ASSOCHAM, available at http://www.fnbnews.com/article/detnew.asp?articleid=31817&sectionid=15 (last accessed on Oct 21, 2014)

4 Annual Report, Ministry of Food Processing Industries, available at http://mofpi.nic.in/H_Dwld.aspx?KYEwmOL+HGpoo8DlNeKVV3fE4aW5+awTGdnZC9kP6Bhp7nsZwxLmTQ== (last accessed on Oct 21, 2014)

5 Tata Starbucks Ltd. Celebrates 50 Starbucks Stores in India, available at http://www.tataglobalbeverages.com/media-centre/news/news-detail/2014/07/09/tata-starbucks-ltd.-celebrates-50-starbucks-stores-in-india-with-its-foray-into-chennai (last accessed on Oct 22, 2014)

6 http://www.foodandhospitalityworld.com/columns/2278-in-the-fast-lane (last accessed on Oct 21, 2014)

7 http://www.fnbnews.com/article/detnew.asp?articleid=36162&sectionid=1 (last accessed on Oct 21, 2014)

8 http://www.fnbnews.com/article/detnews.asp?articleid=35132&sectionid=32 (last accessed on Oct 21, 2014)

9 http://www.fnbnews.com/article/detnews.asp?articleid=35275&sectionid=32 (last accessed on Oct 22, 2014)

10 http://www.restaurantindia.in/article/f-and-b-format/menu-trends/Emerging-Trends-in-Indian-F-B-Segment-162/

11 http://articles.economictimes.indiatimes.com/2014-10-02/news/54560324_1_amazon-india-amit-agarwal-indian-food-industry (Last accessed: October, 21, 2014)

12 http://retail.economictimes.indiatimes.com/re-tales/Success-drivers-for-International-F-B-Brands-in-India/232 (last accessed on Oct 21, 2014)

13 https://www.nzte.govt.nz/en/export/market-research/food-and-beverage/sustainability-trends-for-food-and-beverage-in-asia-may-2014/#toc-india (last accessed on Oct 21, 2014)

14 http://top10companiesinindia.com/2014/02/12/top-10-agriculture-companies-in-india/ (last accessed on Oct 21, 2014)

15 http://www.moneycontrol.com/stocks/marketinfo/netsales/bse/food-processing.html (last accessed on Oct 22, 2014)

16 http://www.findouter.com/Asia/India/Shopping/Supermarkets (last accessed on Oct 21, 2014)

17 http://www.foodengineeringmag.com/globaltop100 (last accessed on Oct 21, 2014)

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