Recent budget there is a Hype and Euphoria on FOOD industry. I am not sure what created the real rush into these but i have made some studies and share my views here. Pls welcome to comment and learn together.


Two of the budget announcement that might be relevant to Food Industry Incentives i would say is this:



APPROVED FOOD PRODUCTION PROJECT






SPECIAL REINVESTMENT ALLOWANCE



These are NOT new incentives infact they were there for sometimes and the government merely extending it.



Lets start with Approved Food Production. In order to qualify, one must take note that it doesnt cover all the sector. I have reproduced the definition by borrowing from the law “Income Tax (…Food Production Project) Rules 2011”…




So one must see that NOT every FOOD PRODUCER are automatically fallen into this incentive. Besides, this incentive has already been there few years back, one must even know if the PLC that you are “jumping into” already have this incentive in place. It may not be relevant to them.


Next, we shall look at Reinvestment Allowance.

RA has been through many stages of overhauled over the years - basically government has tried to make it NOT SO GENEROUS over the claim of RA.

Alright, as a general rule - a MANUFACTURING business can be eligible for RA on “Automation, Expansion, Modernisation or Diversification” as its Qualifying Project. Not all MANUFACTURING is really fallen into definition of Manufacturing. For instance, a few years back, government has “excluded certain manufacturing businesses from RA - e.g. Ice Making, Processing of Waste”

Again, in RA is given for 15 Years - and this incentive is only applicable to those qualifying companies that wish to (say) embark expansion and then has previously enjoyed RA (which is now expired) to go for it. If a company has never enjoy RA in the past - this new budget makes no different to them since they already can apply.

In last budget 2015, the government further streamline the mechanism of claiming RA. It has introduced a new law which carries this effect "the term statutory income with regards to the RA to be construed as the amount of statutory income of a person from a source consisting of a business in respect of a qualifying project.”

Again the law I have reproduced as follows:



In layman terms… say a company has expanded its plantation to grow more at the same time it has a separate manufacturing business that uses the same raw material from the plantation business, the exemption is only applicable to the income from plantation - generally it is to slow down the speed of exemption claimable by the company.


I have not seen much of other incentives that are relevant to explain the euphoria in food making industry - maybe I have overlooked? If yes, please do comment.


As a conclusion, I would like to highlight to investors these questions:

1 - is your target company currently enjoying these incentives? if yes
2 - is your target company intends to go into the “said incentives” by expansion
3 - the incentives itself are not immediately benefiting your target company as it is going to be savings on tax. which can take at least 2 years to see the effect.
4 - how much is the present tax exposure your target company is having.
5 - the incentive is only on the “incentivised area” so not a blanket exemption on the entire group.


Hope this information may help your investment decision

Please share your views.

Calow

28-10-15