Doubling
of tax on fertilisers to 12 per cent under the new GST regime is likely to hit
farmers and manufacturers alike. Currently, fertilisers are subject to an
excise duty of 1 per cent and VAT (value added tax) of up to 5 per cent. Apart from
the rise in tax rate, natural gas, the key raw material for urea manufacturing,
has been kept out of the GST ambit.
With
natural gas remaining out of GST ambit, fertiliser companies will not be able
to claim input tax credit on finished goods, leading to cascading effect.
Natural gas, which was attracting a VAT of 15 per cent, accounts for 75 percent
of cost of production. K Ravichandran, Senior Vice-President, Corporate
Ratings, ICRA, said the compliance burden will increase for the urea industry
as it will have to deal with both the existing tax regime and the GST.
Similarly,
the cost of making complex fertilisers will go up with GST rate on raw
materials — phosphoric acid and ammonia — fixed at 18 per cent and the finished
product will be taxed at 12 per cent.
Importers to benefit
The
increase in tax incidence will put importers of DAP (Diammonium phosphate) and
NPK (Nitrogen, Phosphorous, and Potash) fertilisers at an advantage over
domestic manufacturers of the products.
The
levy of GST on inter-State stock transfers, which are tax free under the
present regime, has stoked up concern for fertiliser companies on increased
working capital requirements, said ICRA.
If
the increased tax burden has to be passed on to the farmers, it will entail an
increase in the MRP by about 6-11 percent for urea and 8-10 per cent for DAP,
NPK and MOP (Muriate of Potash), which could impact demand.
If
the Government shoulders full or part of the additional tax through subsidy, it
will entail an additional subsidy outgo for the government, it added. With
fertiliser industry already reeling under a subsidy backlog of nearly Rs.
30,000 crore, any increase in the subsidy burden will lead to a further
blocking of working capital.
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