1. GST and agriculture: Current rates basket does not augur well for food processing

GST and agriculture: Current rates basket does not augur well for food processing

Here, we assess the likely impact of the new GST regime on agriculture and farmers.

By: and | Updated: June 5, 2017 5:18 AM
GST, GST news, GST latest news, GST india, GST law, GST impact, GST council, GST on agriculture, GST on agricultural sector Fertilisers, which currently attract VAT varying between 0% and 8% (in several states), will now attract 12% tax under GST. (Image: Reuters)

Ashok Gulati & Siraj Hussain

After more than a decade of intense discussion and debate, finally, GST is becoming a reality. Although, in its current form, it is not the perfect GST as originally envisaged, it is being lauded as one of the most transformational reforms since 1991. Finance Minister Arun Jaitley was humble and right in saying that the credit for this goes not just to this government but also to previous ones that conceived and steered it from time to time.

Here, we assess the likely impact of the new GST regime on agriculture and farmers. One can look at it from three angles: (1) is GST going to be inflation-neutral, given that food has 45% weight in the consumer price index (CPI); (2) is GST going to be revenue-neutral, especially which states may lose revenue and how they will be compensated; and (3) does it give some incentives to link farmers with food processing industry, which may help farmers reduce market risk, augment incomes, and create new jobs in rural areas?

Let us look at major inputs first. Fertilisers, which currently attract VAT varying between 0% and 8% (in several states), will now attract 12% tax under GST. That means the prices of fertilisers are likely to go up by 5-7%, unless the government decides to absorb this by increasing subsidy. Pesticides are put in the 18% slab, up from the 12% excise they attract today and VAT of 4-5% in some states. Tractor rates are tricky. Several components and accessories of it are put in the 28% slab, while tractors themselves are in the 12% slab, up from zero excise and VAT of 4-5%. It is not very clear yet whether the input credit claims to cover taxes already paid on components and accessories will exceed the final tax rate of 12% on tractors, and therefore there could be a scope for reduction in tractor prices; or the tax on components may be rationalised and the applicable rate brought down from 28% to 12%. There is quite a bit of confusion here.

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Overall, it seems, from the inputs side, that the cost of cultivation for farmers may increase marginally, which in turn may put mild pressure on agri-prices. But the story is not complete unless we see the taxation structure on agri-output prices.

Most of raw agri-commodities including rice, wheat, milk, fresh fruits and vegetables, etc, are in the zero-tax slab and rightly so as they are consumed by masses. However, it may be interesting to note that a state like Punjab which contributes maximum grains to the central pool, imposes taxes and various cesses to the extent of 12% on wheat and rice. And on top of that, there is the arhatiya commission of 2.5% making the transactions cost of these basic staples in Punjab mandis as high as 14.5%. In a country still ridden with poverty, imposing such high levels of taxation on wheat and rice was nothing short of rent-seeking from the Centre and distorting the markets. Now, with new GST regime, even if commission of 2.5% stays, one hopes that all other taxes and cesses would go away. As a result, the purchase cost of wheat and paddy (rice) from Punjab mandis will go down by 12%. This would be a major gain with several ripple effects. One, the prices of these basic staples in open market should come down by say 5-7%, as most grain-surplus states impose at least that much tax. This was a major distortion in mandis driving the private sector away from Punjab. Now, with zero taxes, the private sector may come back to buy wheat and rice from surplus states, giving a fillip to grain-milling.

At an all India level, FCI may save anywhere from `6,000-8,000 crore, which may show up in a smaller food subsidy bill. But then, surplus states like Punjab, Haryana, Andhra Pradesh, Madhya Pradesh and Chhattisgarh may lose this tax revenue which they are getting from FCI or GoI under the current system. How would they be compensated is not yet very clear even to FCI, although there is a provision for compensating losing states for five years by the Centre. Rationalisation of mandi taxes and associated cess and levies will be the biggest gain from GST as far as agriculture is concerned.

However, the taxation structure for processed food is not very encouraging. For example, fruit and vegetables juices under GST will be taxed at 12%, up from current 5%; fruit jams, jellies, marmalades, fruit and vegetable purees, etc, will be taxed at an even higher 18%, up from 5%. This is surprising as it will discourage the development of food processing industry, especially for perishable fruits and vegetables. Even your humble aloo tikki will attract an 18% tax, if it is in the frozen form! This is contrary to the wishes of even the prime minister who wanted fruit juices to be put in even aerated drinks to ensure good market for farmers.

It may be worth reconsidering these rates and bringing them into to the 5% slab for stronger linkages between farmers and the food processing industry and creating jobs in rural areas. Since the raw material could be sourced directly from farmers instead of entirely depending on middlemen in mandis, e-NAM provides an opportunity to graduate to a real pan-India market for agricultural products. A smooth GST regime can break inter-state barriers on movement and facilitate direct linkage between processors and farmers. This can transform the operations of mandis too if other necessary reforms to free up agricultural markets are undertaken. If it happens, farmers would also welcome GST the way organised industry seems to be celebrating.

  1. K
    K. Nirmal
    Jun 7, 2017 at 9:54 pm
    It is disheartening to note about small farmers committing suicide on a regular basis, because of financial crisis. It is suggested that agricultural income beyond a reasonable limit to be decided by the Government needs to be taxed. The tax collected could be utilised for helping the small farmers; so that the problem of farmers suicide gets resolved.
  2. V
    Jun 7, 2017 at 5:43 pm
    Farmers also buys pumps & accessories. And these accessories, just like tractor spares, have been put under 28 . & remember, that the farmer gets not Input tax credit. In effect, the higher taxes will pinch the farmer hard.

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