‘High’ 12% tax under GST will ‘hit fertiliser firms, farmers’

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 per cent 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.

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 per cent 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 ₹30,000 crore, any increase in the subsidy burden will lead to a further blocking of working capital.