The passage of the 122nd constitution amendment bill [already cleared by Lok Sabha last year] by Rajya Sabha [RS] on August 3, 2016 paves the way for introduction of the Goods and Services Tax [GST]. This is a ‘trans-formative’ reform that will convert the Indian Union of 29 states in to a seamless national market enabling free movement of goods and services as a single ‘uniform’ tax replaces a plethora of existing taxes – at the central and state level.
A single uniform tax regime applicable across all states and union territories will drastically reduce transaction cost [due to elimination of cascading effect of tax-on-tax and withdrawal of a host of local levies] and result in substantial increase in efficiency across the supply chain as interface with multiple authorities over a number of geographical locations gets eliminated.
For fertilizer 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 the central and state levies.
Given the critical role of fertilizers 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 subsidy to the manufacturers. At present, while maximum retail price [MRP] of urea is under ‘statutory’ control and on decontrolled P&K fertilizers too, it gives subsidy to enable low MRP.
The policy in regard to taxing fertilizers and raw materials [RM] used in their production at the central level [customs and central excise duty] 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 additional subsidy under the pricing scheme.
Since 1980, there was no excise duty [ED] on fertilizers and no customs duty [CD] on their import either. In 1999-2000 however, CD was imposed @5% on import of all fertilizers even as exemption from ED continued. In the budget for 2011-12, ED was levied @1% [plus education cess]; in case, a manufacturer wishes to avail of CENVAT credit, he has to pay 5%.
As regards feedstock in urea manufacture viz., natural gas, naphtha, fuel oil [FO] etc, these were either exempt from ED as in case of gas or charged concessional rate on naphtha. In 1997-98, ED on naphtha was removed. The import of naphtha for fertilizer and FO [as feed in fertilizers] is exempt from CD. Import of LNG [liquefied natural gas] attracts CD @5%.
The imports of rock phosphate, sulphur, ammonia and phosphoric acid [used in making P&K fertilizers] were exempt from levy of CD all along. In 1999-2000 , CD was imposed @5% which continues even now. Since, there are virtually no domestic supplies [courtesy, lack of natural resources], there is no question of ED.
As regards state level taxes, except some states like Punjab and Haryana which exempt fertilizer sales from VAT [value added tax], majority of others such as Uttar Pradesh, Andhra Pradesh, Gujarat, Madhya Pradesh etc levy VAT @5%. Madhya Pradesh and Maharashtra levy ‘entry tax’ in addition to VAT. The latter also collects ‘toll tax’ and ‘octroi’ which cannot be recovered from the farmer. Karnataka also levies turnover tax [TOT].
As regards, gas, naphtha and FO, VAT varies from a low of 5% in Rajasthan to a high of 21% in Uttar Pradesh. Andhra Pradesh and Karnataka collect VAT @ 14.5% whereas in Gujarat, it is 15% on gas and 18.5% on naphtha. Gujarat also levies purchase tax on that portion of inputs/consumables used for making urea that is sold outside the state.
In short, even as centre tries to keep fertilizer cost low [vide low/nil CD and ED rates on both finished fertilizers and inputs], states negate this by imposing high VAT especially on inputs used in fertilizer production besides other local taxes. This leads to cascading effect and higher cost of supplying fertilizers [which varies from unit-to-unit] and in turn, higher subsidy outgo as urea as MRP remains fixed.
Under GST, all these taxes viz., ED, VAT, entry tax, purchase tax, octroi will be subsumed under a single tax viz., central GST [C-GST] say, X%; state GST [S-GST] say Y% and integrated GST [I-GST] @[X+Y]% applicable to inter-state trade. That should remove cascading effect, reduce transaction cost and make impact of tax-induced cost uniform across all units irrespective of location.
This is contingent on bringing – apart from fertilizers – all inputs including gas, naphtha, FO etc under GST chain and keeping tax rate low no more @6% including C-GST @3% and S-GST @3% [in sync with extant ED@1% and VAT@5% on fertilizers]. But, on ground zero, we are no where near this scenario.
Going by the report of chief economic adviser, Arvind Subramanian [it has recommended revenue neutral rate (RNR) @18%], even if the lower end is applied to fertilizers, this would be @12%. The possibility of a higher rate is not ruled out considering that the report was based on 2013-14 data and several states have rejected 18% standard rate in the empowered committee of finance ministers.
However, 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.
Electricity generation and distribution is also excluded from ambit of GST. Under the Constitution, Entry 53 in the State List of the Seventh Schedule empowers the States to impose tax on sale and consumption of electricity, except when consumed by GOI or the 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 duty or state VAT paid on equipment and stores get embedded in the cost of the end product. This, together with the non-creditable electricity duty, will results in substantial tax cascading when electricity is used as an intermediate input. Fertilizer units – most of them having captive power plants – will bear the brunt.
Fertilizer manufacturers can claim credit for tax paid on inputs viz., gas/naphtha/power etc. So, why worry? This is easier said than done. GST say @12% levied on MRP which is barely 1/4th to ½ of production cost [courtesy, heavy subsidy on urea] would hardly generate an amount sufficient 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 the fertilizer industry, the GST dispensation will only add to its miseries caused inter alia by short supply of gas, high cost, huge under-recoveries, 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% for fertilizers and these inputs is adopted.
Will the GST Council heed to the dire need for resurrecting this critical industry and ensure its health & growth instead of being obsessed merely with protecting revenue of states?
One can only wait and watch.