Even if the lower end of 12% is applied to fertilisers, it would be double the existing duty
The Goods and Services Tax is being billed as transformative reform that has the potential to drastically reduce transaction costs —owing to elimination of cascading effect of tax-on-tax and withdrawal of a host of local levies—and substantially increase efficiency across the supply chain as interface with multiple authorities over a number of geographical locations gets eliminated.
For the fertiliser industry, however, the picture is not so encouraging. To assess the impact, at the outset, let us take a look at the existing tax structure in regard to central and state levies.
Given the critical role of fertilisers in ensuring food security, for decades, the government has followed a policy of controlling their prices at low level—unrelated to cost of supply—and reimbursing the excess as a subsidy to the manufacturers. At present, while maximum retail price of urea is under statutory control, on decontrolled P&K fertilisers too, it gives subsidy to enable low MRP.
The policy with regard to taxing ferilisers and raw materials used in their production at the central level is attuned to the pricing and subsidy policy environment. It is governed by the dictum that there is no point in collecting a tax only to be paid back as an additional subsidy under the pricing scheme.
All fertilisers attract excise of 1% (plus education cess); in case, a manufacturer wishes to avail of CENVAT credit, he has to pay 5%. Fertiliser imports attract customs duty of 5%. Natural gas and naphtha—feedstock used in manufacture of urea—are exempt from excise, while there is no customs duty on import of naphtha for fertilisers. However, import of LNG attracts a duty of 5%. Import of rock phosphate, sulphur, ammonia and phosphoric acid (raw materials for P&K fertilisers) also attract customs duty of 5%.
At the local level, except for some states like Punjab, Haryana which have exempted fertiliser sales from VAT, majority such as Uttar Pradesh, Andhra Pradesh, Gujarat, etc levy a VAT of 5%. Madhya Pradesh and Maharashtra also levy entry tax. Spreading its tentacles further, the latter also collects toll tax and octroi which cannot be recovered from the farmer.
On gas and naphtha, VAT varies from 5% in Rajasthan to 21% in UP. AP and Karnataka collect VAT of 14.5%, whereas in Gujarat, it is 15% on gas and 18.5% on naphtha. Gujarat also imposes a differential levy called purchase tax on that portion of inputs/consumables used for making urea that is sold outside the state.
In short, even as central levies are either low or nil, states charge high VAT especially on inputs. This leads to cascading effect and higher cost of supplying fertilisers (which varies from unit-to-unit mainly due to inter-state variation in tax on gas/naphtha) and in turn, higher subsidy outgo as urea as MRP remains fixed.
By subsuming all these taxes viz., excise, VAT, entry tax, purchase tax, octroi etc under a single uniform tax, GST will offer a good opportunity to remove all these anomalies. But, the scenario on ground zero raises many hackles.
First, going by the recommendation of chief economic advisor (standard rate 18%, with 12% at lower end and 40% on the higher side), even if the lower end is applied to fertilisers, it would be double the existing 6% (excise of 1% and VAT of 5%). A rate higher than even 12% is not ruled out considering that majority of states want standard rate to be higher than 18%.
Second, a bigger problem is due to the government’s intent to keep gas outside the ambit of GST. This means that gas companies will not be able to claim credit for taxes paid by them on raw materials and other inputs leading to higher price. The states will also continue to levy VAT which in some states is as high as 15-20%. They may even continue with stuff like octroi, purchase tax etc.
Third, electricity generation and distribution is also excluded from ambit of GST. Under the Constitution, Entry 53 in State List of the Seventh Schedule empowers states to impose tax on sale and consumption of electricity, except when consumed by the central government or Railways.
At present, electricity is exempt from CENVAT and VAT. Such exemption results in a situation whereby those engaged in this business are not allowed any credit for taxes paid on their inputs used. Thus, the excise or state VAT paid on equipment and stores gets embedded in cost of the end product. This, together with the non-creditable electricity duty, will result in substantial tax cascading when electricity is used as an intermediate input. Fertiliser units-most of them having captive power plants-will bear the brunt.
Fourth, fertiliser manufacturers can claim credit for tax paid on inputs viz., gas/naphtha/power etc. So, why worry? This is easier said than done. GST of 12% levied on MRP which is barely one-fourth to half of production cost (courtesy, heavy subsidy on urea) would hardly generate an amount sufficient enough to cover tax paid. So, they will be saddled with huge un-covered tax credit year-after-year. It is doubtful whether, government will compensate them via higher subsidy either!
With such an architecture staring at fertiliser industry, the GST dispensation will only add to its miseries caused by short supply of gas, high cost, huge under-recoveries and delayed payment of subsidy etc. It can deliver intended results only if critical sectors like gas and electricity are brought within its ambit and uniform GST at no more than 6% is applicable to fertilisers and these inputs.
Will the GST Council heed to the dire need for resurrecting this critical industry and ensure its health and growth instead of being obsessed merely with protecting revenue of states?One can only wait and watch.
The author is a policy analyst