MAY 23, 2017

By Chetan Agrawal, Principal Associate & Nipun Arora, Associate, Lakshmikumaran & Sridharan

WITH the finalization of GST rates for goods and services, the deadline of 1st July, 2017 for rollout of GST appears to have come one step closer. GST is a major tax reform which is expected to impact various facets of business such as product price, working capital requirement, supply chain, etc. However, in the absence of GST rates the industry was not in the position to evaluate the magnitude of the impact which may vary from one industry to another. Now, after the GST rates for goods and services have been finalized, industry has started such an evaluation.

Besides the imperativeness of availability of food, the agriculture sector otherwise also holds vital position in the economy of India. Agriculture has substantial share in the GDP of country and plays a major role in generating rural employment. Agriculture is also a major source of raw materials to various industries. Recognizing the importance of this sector, the Government (both Central and State Governments) has always extended its support by implementing various schemes and policies. One such policy is the availability of fertilizers at affordable prices in the country which is very essential for meeting the nutrients requirement of agriculture. Pursuant to this, multitude of benefits have also been granted to the fertilizer industry under the current indirect tax legislation's in the form of exemptions/lower rates of taxes/duties at the input and output stages to enable reduced cost of production/import of fertilizer.

Considering the exemptions/concessions available, currently the total incidence of taxes and duties on fertilizers ranges between 5% and 10% across various States. However, the GST Council has fixed the GST rate of 12% for fertilizers. This will result in the increase of tax incidence on fertilizers significantly and consequently, the retail price of fertilizers could go up by 2% to 7%. Such increase in the prices of fertilizers, if not absorbed by any other person, may be passed on to farmers which may discourage the use of fertilizers and may also otherwise cause significant stress on the economy. Moreover, this will also result in increase in the prices of products of those industries which depend upon agricultural sector for their raw material requirements.

Fertilizer is being sold at subsidized price to the farmers. Under GST, the subsidy amount received from the Government is not includible in taxable turnover for the levy of GST. In other words, GST is applicable on the retail price, which may be lower than its cost of production or import, at which fertilizer is being sold to the farmers. Further, the applicable rate of GST on inputs used in the manufacture of fertilizer may also be higher than the rate applicable on fertilizers.

Both these situations may result in accumulation of credit of taxes paid at input stage. Under the proposed scheme of GST, refund of unutilized input tax credit is allowed only in the cases where credit is accumulated on account of zero rated supply or because of inverted duty structure. Refund of accumulated credit is not allowed where sale price of the final products is less than their cost of production. This position leads to an ambiguity as to whether the fertilizer companies would be entitled even to claim refund of accumulated input tax credit partially to the extent such accumulation is attributable to inverted duty structure and if yes, what would be the method for determining the refund amount. Further, such accumulation of credit (partial or full) will result in increase in the cost of production which has to be compensated either by the Central Government in the form of additional subsidy or will be passed on to the farmers by way of enhanced price as highlighted earlier.

Though, with the implementation of GST, the fertilizer industry is likely to be impacted in several other ways, in this article we have made an attempt to highlight only those issues which require immediate attention. Considering the importance of fertilizer for agriculture and the policies driving the fertilizer industry (including the fact that the price of urea is controlled by the Government), it may be appropriate on the part of the Government to take a relook at the GST rate structure for fertiliser industry and also at the provisions relating to refund.

(The views expressed are strictly personal.)