In ICRA’s view, the GST Council’s last minute reduction of GST on fertilisers is a positive step for the farmer community. With the new tax rate being lower than the ~6% taxation prevailing in a majority of the states, fertiliser retail prices should see a marginal reduction and should benefit the farmers. Nevertheless, a few states like Haryana, Punjab, and Andhra Pradesh(AP), where fertiliser sales were exempt from VAT and thus, tax incidence was only 1% excise duty, will face increased tax incidence of 5% and thus, fertiliser prices will see upward movement in these states.
The GST Council reduced the tax rate on fertiliser sales from 12% to 5%, which is nearly in line with the earlier tax regime. Earlier, the GST council had stipulated a tax of 12% in its meeting on May 19, 2017. The new tax regime will replace the existing tax regime, where fertiliser sales were taxed from 1% to 6%, which included 1% excise duty and depending on the state 0%-5% Value Added Tax (VAT). With a 12% tax rate, the burden of the increased tax incidence would have fallen on the farmers as the increased taxes would have been passed on to them through the price increase.
According to Mr. K. Ravichandran, Senior Vice-President and Group Head, Corporate Ratings, ICRA: “The Government has paid heed to the industry demand and the farmer community to reduce the GST on fertilisers from 12% to 5%, which is a positive for the farmer community. The earlier 12% tax rate would have resulted in an increase in fertiliser prices by 6%-10% and could have impacted the demand for fertilisers. However, the new rate of 5% will result in a marginal reduction in retail prices of fertilisers in majority of the states, while Haryana, Punjab and AP, where fertiliser sales were exempt from VAT, will see a 4% increase in the price of fertilisers. ICRA research expects the price of urea to reduce by Rs. 3 per 50 kg bag. The decision, however, is credit neutral for the industry as the working capital requirement would remain unchanged as before.”
The industry had also requested a revisit on the tax rates on the key raw materials for manufacture of DAP and complexes i.e. ammonia and phosphoric acid from the present 18% as it has created an inverted duty structure. However, there has been no change in the tax rate for these commodities and thus the companies will see some erosion in their competitiveness against imports. The importers of fertilisers (such as DAP, MOP and Complexes) will also face excess input taxes as they pay GST in addition to the basic customs duty (5%) on imports, while on the output side only the retail sales portion of the net realisation will attract GST and the subsidy portion is exempted (which typically accounts for 1/3rd of realisation).
“For DAP/NPK manufacturers there is no relief as the tax on the key raw materials i.e. phosphoric acid and ammonia has been retained at 18%, giving rise to an inverted duty structure, where the final output i.e. DAP/NPK fertilisers are taxed at 5% while raw material is taxed at 18%. As a result, the competitiveness of domestic manufacturers against importers will erode. Timely refund of excess input tax credit by the government will be the key to the liquidity position of both domestic manufacturers and importers of P&K fertilisers.” Mr. Ravichandran added.