Context
GST is becoming a reality. We have to assess the likely impact of the new GST regime on agriculture and farmers.
Major Issues
- Is the GST going to be inflation neutral, given that food has 45 per cent weight in consumer price index (CPI)?
- Is the GST going to be revenue neutral, and especially, which states could lose revenue and how will they be compensated?
- Does it give some incentives to link farmers with the food processing industry, which may help them reduce market risk, augment incomes and create new jobs in rural areas?
Need for GST
- VAT rates and regulations differ from state to state. And it has been observed that states often resort to slashing these rates for attracting investors. This results in loss of revenue for both the Central as well as State government.
- On the other hand, GST brings in uniform tax laws across all the states spanning across diverse industries. Here, the taxes would be divided between the Central and State government based on a predefined and pre-approved formula.
- In addition, it would become much easier to offer services and goods uniformly across the nation, since there won’t be any additional state-levied tax.
Benefits of GST
- GST will reduce the complexity of taxes.
- It can facilitate seamless movement of goods across states.
- It will reduce the transaction costs of businesses.
- The procedure of GST registration would also be made simple, thereby improving the ease of starting a business in India.
- There are expectations among experts that with GST, we may see 2% jump in GDP growth.
- GST will plug the leakage of tax. This, in turn, gives more money in the government exchequer.
- Companies which are under unorganized sector will come under the tax regime.
- Number of tax departments will reduce which in turn may lead to less corruption.
- In the long run, the lower tax burden can decrease the prices of goods and services.
Challenges
- Government is facing the implementation challenge. Even after providing a deadline, interface for GST filling is not yet ready.
- The numbers of returns a business have to file have been increased.
- There is still lack of clarity on which of the slab will apply on which of good
- India’s industry and its banking system will have to change systems, train personnel and accept the extra workload for the new taxation system.
- According to past experiences from other countries, businesses need to start early with the implementation process to be GST-ready. But it not the case with Indian industry.
Some Statistics related to GST in Agriculture
- Fertilizers, which currently attract VAT varying from 0 to 8 per cent in several states, will now attract 12 per cent tax under the GST. That means the price of fertilizers is likely to go up by 5-7 per cent, unless the government decides to absorb this by increasing the subsidy.
- Pesticides are put in a slab of 18 per cent, up from the 12 per cent excise today and a VAT of 4-5 per cent in some states.
- Tractor rates are tricky: Several components and accessories are put in a slab of 28 per cent, while tractors are under the 12 per cent slab, up from zero excises and a VAT of 4-5 per cent.
- Most raw agri-commodities ranging from rice, wheat, milk, fresh fruits and vegetables, are in the zero tax slab.
- Under the GST, agriculture produce from foodgrains, oilseeds, fruits and vegetables, milk, spices, fish, meat, and sugarcane will attract zero duty.
Possible impact of GST on agriculture
- At an all-India level, Food Corporation of India (FCI) may save anywhere from Rs 6,000-8,000 crore, which could show up in a lesser food subsidy bill.
- The rationalization of mandi taxes and associated cess and levies will be the biggest gain from the GST.
- One of the major issues faced by the agricultural sector is the transportation of agriculture products across state lines all
- GST would provide each trader, the input credit for the tax paid on every value addition. This will create a transparent, hassle-free supply chain which would lead to free movement of agri-commodities across India.
- Implementation of GST may reduce food inflation, as grain and milk would remain exempted under the new regime that would put in place a single levy instead of multiple taxes.
- Fruit and vegetable juices will be taxed at 12 per cent, up from the current 5 per cent; fruit jams, jellies, marmalades, fruit and vegetable purees, etc. are taxed even higher at 18 per cent, up from 5 per cent. This will discourage the development of the food processing industry, especially for perishable fruits and vegetables.
Suggestions and Conclusion
- It may be worth reconsidering these rates and bringing them down to the 5 per cent slab for stronger linkages between farmers and the food processing industry and creating jobs in rural areas.
- Since the raw material could be sourced directly from farmers instead of being entirely depending on middlemen in mandis, e-NAM provides this opportunity to graduate to a real pan-India market for agricultural products.
- GST would ensure that farmers in India, who contribute the most to GDP, will be able to sell their produce for the best available price.
- A smooth GST regime can break inter-state barriers on movement and facilitate direct linkages between processors and farmers. This can transform the operations of mandis too if other necessary reforms to free up agricultural markets are undertaken.
Update
Recent Updates
- Centre’s GST audit steps may add to compliance burden.
- Revenue expenditure of states has risen sharply with greater financial devolution and increased expenditure, a gap which will further increase with GST.
- The government has set up 18 sectoral groups, comprising senior members from the Centre and the States, to ensure the smooth rollout of the Goods and Services Tax.
- Except branded foodgrains and flours that will attract a 5% GST, cereals, pulses and atta will be tax-free.
- The imminent roll-out of the Goods and Services Tax (GST) is unlikely to bring in either higher prices for consumers or result in any major supply disruption.
Some statistics
- According to the Reserve Bank of India (RBI), even as the fiscal position at the Centre remains stable (Central budget deficit for 2017-18 pegged at 3.2% of gross domestic product), there has been a marked deterioration in the gross fiscal deficit of states taken as an average (over 3% of GDP in 2015-16 and 2016-17 relative to an earlier five-year average of 2.5%).
- The figure for 2016-17 is not finalized yet but could be as high as a deficit of 3.4%.
- The revenue deficit at the aggregate state-level remains close to zero (-0.1% of GDP for 2016-17).
- Revenue expenditure of the states has risen sharply in recent years with greater financial devolution and increased expenditure.
- In aggregate, the states spend about 30% more than the Centre. This gap will further increase with GST.
Despite the increase in magnitudes, the categories and priority of state expenditures have not changed materially. State revenue expenditure is concentrated on education, health and rural development.
What is GST?
- The proposed Goods and Service Tax (GST) is a destination based indirect tax that will be levied on supply of goods and services, which is set to subsume the various indirect taxes currently levied by the Centre and the states including excise duty, service tax, value added tax (VAT), Central Sales Tax (CST), purchase tax, octroi, entry tax etc.
- These taxes are levied at various stages viz manufacture, sale, entry of goods, rendition of services etc.
- Credits of input taxes paid at each stage will be available in the subsequent stage of value addition, which makes GST essentially a tax only on value addition at each stage.
- The final consumer will thus bear only the GST charged by the last dealer in the supply chain, with set-off benefits at all the previous stages.
- The proposed GST structure is two-tiered, whereby tax would be levied by both Centre and state on intra-state supply of goods or services viz. the Central Goods and Service Tax (CGST) and State Goods and Service Tax (SGST) respectively.
- The Central GST and the State GST would be levied simultaneously on every transaction of supply of goods and services except on exempted goods and services
- Credit of the above taxes would available throughout the entire supply chain and the ultimate burden would be borne by the customer.
- In case of inter-State transactions, the Centre would levy and collect the Integrated Goods and Services Tax (IGST) on all inter-State supplies of goods and services under Article 269A (1) of the
GSTN
- For the implementation of GST in the country, the Central and State Governments have jointly registered Goods and Services Tax Network (GSTN) as a not-for-profit, non-Government Company to provide shared IT infrastructure and services.
Import taxation
- The Additional Duty of Excise or CVD and the Special Additional Duty or SAD presently being levied on imports will be subsumed under GST.
- IGST will be levied on all imports into the territory of India.
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