States tax big on grain purchase, put governments food plan in a fix

Written by Sandip Das | New Delhi | Updated: May 2 2013, 07:04am hrs
Food inflation continues to haunt the country's policymakers. At the consumer level, it stood at a worrying 12.42% in March. Now, hefty levies on grain procurement imposed by revenue-hungry states are stretching their patience. In the five largest grain-producing states with a surplus, these levies account for 10-15% of the minimum support price (MSP). Orissa is the latest to hike statutory levies on rice procurement in the current kharif marketing season (2012-13) to 12% from 8.5% last season. Inclusive of VAT and all other levies and charges, the impost is the highest in Punjab at 14.5% (see chart above).

According to an official with the Orissa state food and civil supplies department, along with 5% VAT and 2.5% commission to more than 2,300 Primary Agricultural Cooperatives and market fee of 2%, the state also has imposed taxes such as administrative charges (1%), rice drying charges (1%) and levies such as custody maintenance, mandi labour, grain-handling and transportation charges that pushes the total levies to more than 12%.

This tax is imposed over the Minimum Support Price (MSP) of paddy fixed at R1,250 a quintal for season by the Centre. It is estimated the state government gets close to R200 crore annually by undertaking rice procurement on behalf of the Centre.

With Orissa set to contribute about 10% of the total 40 million tonne of rice to be procured this season (2012-13) by the Food Corporation of India (FCI) across the country, the eastern state has followed the trend of higher taxes regime prevailed with the other key contributors to the central pool such as Punjab (14.5%), Andhra Pradesh (12.5%), Haryana (11.5%) and Chhattisgarh (9.7%).

Ashok Gulati, chairman, commission for Agricultural Costs and Prices (CACP), told FE that higher taxes and other statutory levies imposed by grain-procuring states distort and fragment the national market and drive away private sector participation from grain purchase, impacting processing and value-added industry.

The Centre needs to sit down with states to rationalize these taxes and commissions to no more than 5% across all states and compensate a part of the losses to states currently with high taxes through special assistance. This will bring rich dividends, Gulati said.

The rising taxation regime on the grain procurement by FCI and state government-owned procuring agencies has also pushed up government's food subsidy bill as the Centre is at present paying R8,000 to R10,000 crore annually as taxes to procuring states for foodgrains mostly wheat and rice.

Food minister KV Thomas said We need to reduce high state-level taxes in a phased manner as these taxes are also adding to the country's food security bill. But we also acknowledge that these taxes on procurement are the key sources of revenue specially for Haryana, Punjab and other states.

States get funds from the Centre through various schemes to develop procurement-related infrastructure. Yet, they keep imposing taxes on procurement. So, the revenue generated through taxes and other charges on grain procurement is going to the states budget and is used elsewhere. These taxes are nothing but another form of central resources the states are enjoying without having to do anything special for it, said a food ministry official.