One of the most radical decisions taken at last week’s Srinagar meeting of the Union and state finance ministers to approve rates applicable to various commodities under the new Goods and Services Tax (GST) regime was to fix these at zero per cent for most primary farm produce.
Its implications would be felt especially in states that are large agricultural producers, but aren’t leveraging this advantage adequately due to trade-distorting taxes and levies. All these levies — imposed by state governments; the Centre currently taxes neither production/sale of farm produce nor agricultural incomes — are expected to go with a nationwide GST coming into force from July 1.
There is no better example of a state that would be impacted from the latest decision than Punjab, which covers just 1.53 per cent of India’s land area, but is its third largest foodgrain producer (after Uttar Pradesh and Madhya Pradesh) and contributes the highest share of both wheat and paddy/rice to the Central public distribution pool.
Punjab now levies a 5 per cent value added tax (VAT), a 3 per cent “infrastructure cess” and a 2 per cent “rural development cess” on the purchase price of foodgrains — in addition to a 2 per cent market/mandi fee and 2.5 per cent fee charged by arhtiyas (commission agents). Under GST, there will be no VAT and the cesses, too, are supposed to be subsumed within the zero per cent GST. The market fees and arhtiya commission can technically remain, as these are in the nature of user/service charges.
“Even if the taxes totalling 10 per cent go, it translates into huge savings, more so in the wholesale commodity trade business where margins are often in low-single digits. In fact, even the 2.5 per cent arhtiya commission is too high. It shouldn’t be more than one per cent,” opined Ashok Gulati, former chairman, Commission for Agricultural Costs and Prices.
According to Naresh Ghai, president of Punjab Roller Flour Mills Association, the abolition of taxes will have two effects. First, it will “revive trading and private purchases of grain”. Out of the total wheat arrivals of 119.12 lakh tonnes (lt) in Punjab’s mandis during the current marketing season, a mere 2.62 lt was bought by private traders and millers. The rest was procured by government agencies. “Today, there’s virtually no private grain trade because nobody can afford to pay 10 per cent tax, on top of other charges,” pointed out Ghai.
The second effect of zero per cent GST will be to induce more food processing industries in Punjab. “We are called the granary of India, but our own flour mills are operating at hardly 40 per cent capacity. That should hopefully change, if both existing and new mills are able to source economically-priced wheat from within Punjab,” added Ghai.
Punjab has 75-odd roller flour mills with a capacity to process some 6,400 tonnes of wheat daily, whereas they are now doing only 2,500-2,600 tonnes. “Even that is restricted to just supplying atta (whole wheat flour), sooji (semolina) and maida (flour without bran used to make breads such as naan and paranthas) for consumption within the state. As a large wheat producer, we should actually be supplying not just traditional flour products, but even noodles, pasta, bread and buns to the rest of India,” noted Dharminder Singh Gill, director of Gillco Agro Private Ltd, a Ludhiana-based flour miller.
Punjab millers procure only 25-30 per cent of their wheat from within the state. For the remaining 70-75 per cent, they are reliant on wheat from other states or from the Food Corporation of India through its tender-based open market sales scheme. “The economics is simple. At the current minimum support price (MSP) of Rs 1,625 per quintal, the taxes alone are Rs 162.50, whereas it costs not more than Rs 90/quintal to transport wheat from Bareilly (Uttar Pradesh) to Ludhiana or Rs 115-120/quintal from Kota (Rajasthan) to Ludhiana. It may, in fact, be cheaper to even source atta from UP to sell in Punjab, rather than producing from locally produced wheat,” remarked another miller.
“If taxes on primary produce is made zero, I won’t be surprised to see even big branded players setting up processing units in states like Punjab. Being in an area where there is abundant raw material available for processing is always an advance. It will be so more with the proposed GST tax structure,” pointed out Dharminder Joshi, general manager at Shakti Bhog Foods Ltd. Shakti Bhog, along with ITC Ltd’s Aashirvaad, General Mills India’s Pillsbury and Cargill India’s Nature Fresh are leading atta brands.
The one big loser from doing away with taxes on primary farm produce, however, could be state governments. The value of 119 lt of wheat and 166 lt of paddy arrivals in Punjab’s mandis alone, at their respective MSPs of Rs 1,625 and Rs 1,510 per quintal for the 2016-17 crop year, would be around Rs 44,400 crore. 10 per cent taxes on that works out to Rs 4,440 crore, which is the potential annual revenue to be foregone by the state. Half of this amount, which is the VAT portion, may be compensated by the Centre through a formula guaranteeing a yearly 14 per cent tax revenue increase. Any actual revenue realisation shortfall against this, post GST implementation, will be met by the Centre, but for only for a five-year period.
“We will have to find alternative revenue sources to bridge the losses from subsuming our taxes under GST, especially after five years. That will require remodelling our economy, so that more food-processing units along with other industries come up, expanding the state’s GDP and overall revenue base. In any case, we cannot for long remain a cereal-based agrarian economy,” Punjab’s finance minister Manpreet Singh Badal told The Indian Express.
Everyone is agreed that GST can be a game-changer. “There are glitches. The rates on fruit and vegetable juices, jam, sauces, purees, mixes, concentrates and a host of processed foods have been set at 12 to 18 per cent. If we want to give a real boost to agriculture and agri-based industries, the GST slabs should have been zero on primary farm produce and 5 per cent on all processed foods”, argued Gulati.
But zero GST on agricultural produce is still a big deal.
(With inputs from Harish Damdaran in New Delhi)