Higher Taxation Under GST to Be Credit Negative for the Fertiliser Industry

The Goods & Services Tax (GST) regime has stipulated 12% tax on the sale of fertilizers, effective July 1, 2017. This will replace the present tax regime whereby the sale of fertilisers is subject to an excise duty of 1% and VAT upto 5% by few states thereby the overall tax incidence being 6%. According to ICRA,additionally, natural gas, the key raw material for urea manufacturing, has been kept out of the GST’s ambit while phosphoric acid and ammonia, key raw materials for complex fertilisers, are to be taxed at a rate of 18%.

The Goods & Services Tax (GST) regime has stipulated 12% tax on the sale of fertilisers, effective July 1, 2017. This will replace the present tax regime whereby the sale of fertilisers is subject to an excise duty of 1% and VAT up to 5% by few states thereby the overall tax incidence being 6%. According to ICRA, natural gas, the key raw material for urea manufacturing, has been kept out of the GST’s ambit while phosphoric acid and ammonia, key raw materials for complex fertilisers, are to be taxed at a rate of 18%.

K Ravichandran, Senior Vice-President and Group Head, Corporate Ratings, ICRA, said, “As natural gas remains outside the ambit of GST, fertiliser companies will not be able to claim input tax credit on the taxes paid on finished goods, leading to a continuation of the cascading effect of taxation. For urea producers, in particular, a key issue will arise from the non-inclusion of natural gas, which accounts for ~75% of the cost of production, in the GST regime and which attracts VAT to the extent of 15% in certain States.” Moreover, compliance burden will increase for the urea industry as they will have to deal with both the existing tax regime and the GST.

For complex fertiliser producers, the key raw materials i.e. phosphoric acid and ammonia will attract an 18% GST, while finished products will be taxed at 12%. Due to the subsidy element for finished goods and relatively low-value addition in this business, the tax incidence on raw materials will be higher than that on finished products, resulting in unused input tax credits for the industry and thus blocking working capital with the tax authorities. This will also put importers of DAP/NPK fertilisers at an advantage over domestic manufacturers of these products, which could lead to the weakening of profit margins for the latter. Another matter of concern for the fertiliser units would be the levy of GST on inter-state stock transfers, which are tax-free under the present regime due to various concessions. However, under the GST regime tax will be levied on the inter-state transfer of goods between related parties as well, thus higher taxes will have to be paid upfront by the industry during the dispatch of fertilisers leading to increased working capital requirements.

The increased tax levy on complex fertilisers will result in an increase in MRP or increased subsidy or both. If the increased tax burden has to be passed on to the farmers, it will entail an increase in the MRP by around 6%-11% for urea and 8%-10% for DAP, NPK and MOP, which could impact demand. On the contrary, if the Government shoulders full or part of the additional tax through subsidy, it will entail an additional subsidy outgo for it.

With fertiliser industry already reeling under a subsidy backlog of nearly Rs 300 billion, any increase in the subsidy burden will lead to a further blocking of working capital. Thus higher tax levy on fertiliser sales under the GST regime will be credit negative for the fertiliser industry. While the inclusion of subsidy in value has been done away with, the GST council needs to clarify a few more issues.

“In line with the present taxation regime, the subsidy element has been kept out of the ambit of GST, which is a positive, as its inclusion would have increased the tax incidence on fertilisers. However, the issue of refund of excess input tax credits, according to some estimates ~Rs 60 billion annually, from the tax department still requires more clarity.” Mr K Ravichandran added.