Urea Out Of GST: FinMin Wish list

The Ministry of Chemicals and Fertilisers has sought to exempt urea fertiliser from the proposed Goods and Services Tax (GST) and to remove customs duty on import of plant and machinery for fertiliser projects. Non-urea fertiliser is mostly imported, which is why the GST proposal has only urea in mind, though it speaks of the entire sector.
Taxes and duties are levied on the maximum retail price (MRP) fixed by the government, which covers only 25.40 per cent of the cost. The inputs for urea production are, however, taxed at full cost, resulting in a tax incidence on the inputs far in excess of that on the finished fertiliser.
Thus, under the proposed GST, the input tax credit will far exceed the tax payable on fertiliser, meaning the input credits will be far more than what could ever be availed on the outputs. Thus, it would block large amounts of input tax credit of fertiliser companies with the government on a recurring basis, even if there is provision of periodic cash refund. Currently, there are no provisions for refund of unadjusted credits in GST, except for refunds on exports. Hence, goes the argument, the sector (meaning, urea) should be exempt from GST.

Also, it notes, a number of crucial inputs for urea manufacturing like natural gas, electricity generation and petroleum products are out of the GST ambit. Besides, the GST model seeks to exempt the food, health and educational sector. Fertiliser, goes the added argument, is a crucial input for foodgrain and should be also exempt from GST.

On import of plant and machinery, the ministry feels exemption from customs duty would not only reduce the overall cost of fertiliser but also the subsidy burden on the government. This is because it would relieve the industry from blockage of large funds by first paying the import duty and then claiming its reimbursement by way of subsidy. The government levies one per cent excise duty on fertiliser without input tax credit and five per cent excise duty with input tax credit, so that it could be brought under GST as and when it is implemented. Major inputs for fertiliser production continue to remain exempt from excise duty. On the other hand, state governments levy a host of taxes in manufacture of urea like sales tax, additional sales tax, value added tax (4-12 per cent across states), excise duty, entry tax and octroi.

Taxes and duties paid by fertiliser manufacturers cannot be passed on to the consumer as the MRP of urea is fixed by the government. Thus, these taxes should form part of the concession rate for reimbursement. This is because the manufacturers get reimbursement of these taxes and duties through fixation of concession rates and in case such taxes are not recognised at some level, it results in a direct loss to the manufacturing unit. For example, nonreimbursement of turnover tax, purchase tax and other taxes levied by some states are neither recognised in the earlier regime of Retention Pricing Scheme or the new scheme in vogue since 2010.

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