Indian Agriculture in the GST Framework
Naveen P. Singh and Jaiprakash Bisen
Tax policies are one of the important fiscal tools with the government to achieve the twin national objectives i.e. maintaining economic stability while boosting economic growth of the nation. The recent indirect tax policy reform in the form of Goods and Services Tax (GST) by government is believed to be transformative and visionary in that it would help the government to minimize its fiscal deficit due to wider horizontal span of tax, elimination of operational as well as structural inefficiencies in the taxation system and redistribution of resources from less productive to more productive sectors. In present socio-economic as well as in political parlance, GST has become a buzz word and the government officials, policy makers and laymen are skeptic about its implications on the economy. However, two waves of thoughts have evolved on GST’s implications on agricultural sector, which can be classified into myths and reality. This article attempts to bring together the myths and realities and tries to break the myths regarding its implications on agricultural sector. The present article has been divided into two parts namely – myths and realities and concludes after discussing the two in detail and is restricted to agriculture only leaving aside dairy farming, poultry farming, stock breeding, cutting of wood or grass, gathering of fruit, raising of man-made forest or rearing of seedlings or plants (as the definition of agriculture excludes these in model GST act).
Myths about implications of GST on agricultural sector:
With the implementation of GST various myths about the implications of GST on agricultural sector have mushroomed up and molded the mindset of different stakeholders in one way ignoring other side. These myths are:
*Prices of different fertilizers will increase after implementation of GST.
*Impact on organic farming will be negative due to increase in price of bio-fertilizers and bio-pesticides.
*Usage of plant protection chemicals will reduce after GST implementation.
*Effect on micro-irrigation practices is not clear.
*Cost of farm mechanization would be higher as prices of agricultural machineries have increased after GST implementation
*The prices of agricultural services will remain the same as agricultural services are kept outside GST
*GST will lead to increase in prices of agricultural commodities.
*Agricultural supply chain would be ill affected as logistic services to be taxed under GST.
*GST will slow down the growth of agricultural sector.
Realities about implications of GST on agricultural sector:
We attempt to answer these above mentioned myths after a comprehensive study of tax rates on agricultural commodities in Value Added Tax (VAT) and excise as well as GST regime of taxation and clarify the myths.
Because of various exemptions/concessions to the fertilizer industries in excise and VAT regime the total incidence of tax on fertilizer products was about 5-10 per cent of the value of finished fertilizer products However, placement of fertilizers in five percent tax slab after the implementation of GST would decrease overall tax on fertilizers by 2-3 per cent as a result of which the prices of
Fertilizers like Urea, Di-Ammonium Phosphate (DAP) and Muriate of Potash (MoP) are expected to be reduced by Rs. 6, 11 and 18 per bag, respectively. As a result of a marginal reduction in the price of fertilizers, their usage is expected to increase and consequently the crop production.
On the other hand, prior to implementation of GST, the tax rates on micronutrient fertilizers were different across the states (4, 6, 5.5, 0 and 0 per cent in UP, Maharashtra, Karnataka, MP and Punjab respectively) but lower than the tax rates after GST implementation. The price rise of micronutrient fertilizers because of their placement in 12 per cent tax slab may act as deterrent to their usage in micronutrient deficient areas but would certainly encourage their judicious application in regions of rampant usage.
It’s unjust to say that organic farming will be negatively affected after GST implementation as the inputs used in organic farming namely bio-fertilizers, bio-pesticides, and bio-stimulants are not defined under any tax slab in GST regime. It would be unjust to attribute rise in price of these inputs if any due to any reason to GST. However, the branded farm yard manure (FYM) is taxable @ 5 percent under GST regime. But, it is to be considered that, the usage of branded FYM is restricted to gardening in urban areas and its share in total organic manure consumption for crop production may be negligible. Neither the commercial organic farms nor farmers apply any branded FYM for crop production. Hence, GST doesn’t have any negative implications on organic farming practices for commercial crop production.
Plant protection chemicals like pesticides, weedicides, rodenticides and herbicides are indispensible part of modern agricultural system. However, their rampant usage leads to several critical problems like residue accumulation in soil, bio-magnification and loss of beneficial fauna from the agricultural ecosystem. 18 per cent taxation on plant protection chemicals would check their rampant usage and call for their judicious application which would not only compensate their price rise but also benefits the environment and biodiversity. On the other hand, Maharashtra witnessed reduction in tax rate on plant protection chemicals by 0.5 percent which was 18.5 per cent prior to GST. The recent unrest linked to plant protection chemicals in different parts of the country should not be linked to their higher prices but to their quality. It is well accepted fact that the farmers are ready to pay higher prices for the plant protection chemicals if the quality of it is on par with the standards set for it.
Micro-irrigation being an important component of precision farming practices is instrumental in increasing the resource use efficiency in agriculture. Apart from raising the resource use efficiency, micro-irrigation (drip and sprinkler irrigation system) is an economical strategy to irrigate the land in the regions with undulated terrain.
It is true that, manually operated/ animal driven and power driven land preparation agricultural equipments are taxed @ 12 per cent in GST regime which were non-taxable under central excise and VAT regime. However, it is to be noted that, growth of the farm mechanization in major crops like paddy, wheat, sugarcane, cotton and corn in India is led by tractor and harvester of which tractor led growth is more significant. The cumulative tax rate on tractor and power tillers is reduced by 4.5 to 6.5 percent in different states in GST regime whereas the harvesting equipments become costly by six to eight percent in different states. On the other hand, centrifugal pumps used to pump water for irrigation has become cheaper by about 3.5 to 6.5 percent in states like UP, Punjab and Maharashtra respectively. On the flip side of coin, plant protection equipments like sprayers and dusters are taxed more after GST implementation. It is to be noted that, the decline in price of heavy farm machineries is greater than the increase in cost of smaller farm equipments after implementation of GST.
It is partially true that the price of agricultural services will remain same due to exclusion of agricultural services from GST. Agricultural services include- a) farm related services (agricultural operations directly related to production of any agricultural produce which do not alter essential characteristics of agricultural produce but make it marketable for the primary market; renting of agro machinery or vacant land with or without a structure incidental to its use; secondary marketing functions; agricultural extension services; services provided by any Agricultural Produce Marketing Committee or Board or services provided by a commission agent for sale or purchase of agricultural produce, etc.), b) agricultural support services (viz. banking, insurance and warehousing and transportation) and c) research and development (R&D) services.
The current policy of indirect tax partially exempts the agricultural services and includes some of the above mentioned services like R&D services under tax radar.
Agricultural commodities which are consumed in fresh or raw form like fruits and vegetables, milk and items of daily importance like sugar, milled rice, wheat flour, and pulses etc. which are not sold under any brand are non-taxable items under GST regime. However, any agricultural commodity that undergo intense processing that changes its essential characteristics like tea, coffee, bakery products, and other processed products of industries which draws its raw materials from agricultural sector are taxed under different categories. Thus, it is to be noted that, price of all agricultural commodities will not experience hike post-GST implementation. On the other hand, food product constitutes only 19 per cent of overall FMCG industry in 2016 that means majority of the food trade in India is mostly done by unorganized players in unbranded form. Hence, the prices of food items of daily consumption importance except the branded food product will not experience any hike due to GST.
It is thought that small traders in small town that the cost of logistics of farm produce would increase as many of the services have been included under tax net. But, in actual the real cost of logistics and supply chain has declined after GST implementation. It is expected that in GST regime about 20 per cent timing at the interstate checkpoint to be reduced and the run time of the road transportation will increase by another 80-100 km per day which not only increase the logistics efficiency of the supply chain but also curtail the wastage of the perishables during transit. Additionally, this E-way bill will not only ease the movement of freight further and the receipt would act as goods ticket for the entire journey but will also help to track the location of goods carrier and thereby help in delivering the commodities at the destination in time
GST has multi-fold influence on the growth of agricultural sector in the country. On the one hand it creates a congenial environment to boost up agricultural production and productivity by positively affecting the input markets (like fertilizers, power operated land preparation equipments mainly tractors and power tillers, irrigation equipments etc.) and on the other hand it helps in addressing the institutional challenges; supply side constraints (like higher waiting time in toll booth, multiplicity of taxation, trade barriers on the state borders etc.) that would increase the efficiency of agricultural supply chains across the nation and thereby make agricultural produce available to the mases. Elimination of multiple taxes and cascading effect of taxation, increased compliance and better resource allocation would not only weed out the inefficiencies of agricultural system but also bring the sector on faster growth trajectory. Hence, in post GST era, agricultural sector is likely to witness a sustained and equitable growth.
The change in the rule of game of taxation has infused the sector with drivers like higher efficiency, transparency and greater compliance which are strong enough to pull out the sector out of initial hiccups. The comparative study of agricultural sector in excise and VAT regime as well as in GST regime makes it very clear that, inputs like seed, fertilizers, centrifugal pumps, tractor and power tiller are bound to become cheaper in the new tax regime while the plant protection chemicals, micronutrient fertilizers and harvesters price may go up slightly, whose incremental cost is less than the incremental benefits of the decrease in prices of other inputs. On the product side only processed and branded agricultural products are bound to experience little price hike. However, majority of the food consumption in India is in the fresh form and since the commodities which require processing and are of daily consumption (rice, pulses, oilseeds, sugar etc.) are zero rated, thereby will not have any negative implications on consumption side also. Hence, agriculture sector is not likely to witness any negative impact.
(The Naveen P. Singh is Principal Scientist, ICAR-National Institute of Agricultural Economics & Policy Research (NIAP), New Delhi and Jaiprakash Bisen is PhD Scholar, Division of Agricultural
Economics, IARI, New Delhi)