A group of state finance ministers (GoM) on Wednesday decided against imposing a tax-system-distorting ‘sugar cess’ to raise resources for supporting cane farmers. Instead, the panel favoured a cut in the GST on ethanol from 18% to 12% and exploring the legality of a 1% ‘agriculture cess’ on luxury items as alternative ways for lending a helping hand to cane growers and the sugar industry.
The food ministry had earlier mooted a cess of up to Rs 3/kg on supply of sugar over and above 5% GST on the sweetener. The cess proceeds, seen at Rs 6,700 crore, were to flow into a dedicated fund and to be used to finance any gap between the cane price mills can pay to farmers in accordance with the Rangarajan panel formula and the benchmark rate fixed by the Centre.
At the subsequent GST Council meeting in May, however, divergent views emerged on the proposal, as many state finance ministers felt that such an impost would mark a departure from a recent policy consensus against cesses that are incompatible with a modern system of indirect taxes, free from tax cascades. The GoM, headed by Assam finance minister Himanta Biswa Sarma, was therefore set up to iron out the differences.
To soften the blow to sugar mills, the Centre last month approved a package, comprising Rs 4,440-crore loans to mills to expand ethanol production capacity and Rs 2,507-crore aid in the form of interest subsidy on the loan and carrying cost of creating a buffer stock. Sarma said arrears due to cane farmers had come down to Rs 18,000 crore from Rs 23,000 crore. “Considering this positive development, we do not think there is a case for levying cess on sugar at the moment.”
In case the attorney general’s opinion is favourable, the GoM may look at the option of levying 1% agriculture cess on luxury goods which could be imposed to deal with any unforeseen circumstances in the farm sector, Sarma said. Currently, only specified ‘sin’ goods attract a cess over and above the highest rate of GST at 28%. The Centre has largely supported the idea of a sugar cess because it doesn’t have to share its proceeds with the states.
An overall GST rate hike would be more taxing for consumers, given that the Centre has to part with 42% of its share with the states. And states where sugar cane is not a major crop would not have liked to share the burden. Although the food ministry has been demanding a 5% GST on ethanol, experts said the council is only likely to bring parity between ethanol and bio-diesel, which saw a rate reduction from 18% to 12% in January. The GoM’s recommendations would be considered by the GST Council at its 28th meet on July 21.
Prior to the GST rollout on July 1, 2017, a cess was levied and collected under the Sugar Cess Act, 1982, as duty of excise for the purpose of the Sugar Development Fund. Through Taxation Laws Amendment Act, 2017, various cesses, including sugar cess, were abolished with effect from July 1, 2017. A new sugar cess would have required a new legislation. Other members of the GoM are: Uttar Pradesh finance minister Rajesh Agrawal, Maharashtra finance minister Sudhir Mungatiwar, Kerala finance minister Thomas Isaac and Tamil Nadu fisheries minister D Jayakumar.