With Goods and Services Tax (GST) rate being lower than 6% levy prevailing in a majority of the states, domestic credit rating agency, ICRA in its latest report has said that retail prices of fertiliser will come down marginally, which would in turn benefit the farmers. Nevertheless, it also said that a few states such as Haryana, Punjab and Andhra Pradesh, where fertiliser sales were exempt from value-added tax (VAT) and attract only 1% excise duty, will face increased tax incidence of 5% and thus prices will see upward movement in these states.
The rating agency said that the government has paid attention to the industry and farmer demand to reduce the GST on fertilisers to 5% from 12%, which is positive for the farming community. It noted that the earlier 12% tax rate would have led to an increase in fertiliser prices by 6-10% and could have impacted the demand. Though, it said that the new rate of 5% will result in a marginal reduction in retail prices of fertilisers. Besides, ICRA expects that the move would reduce the cost of a 50 kg bag of urea by Rs 3. However, it added that the decision is credit neutral for the industry as the working capital requirement would remain unchanged as before.
According to the report, for DAP and NPK manufacturers there is no relief as the tax on the key raw materials, that is phosphoric acid and ammonia, has been retained at 18%, giving rise to an inverted duty structure, where the final output (DAP or NPK) fertilisers are taxed at 5%, while raw material is taxed at 18%. As a result, it noted that the competitiveness of domestic manufacturers against importers will erode. It pointed out that a timely refund of excess input tax credit by the government will be the key to the liquidity position of both domestic manufacturers and importers of P&K fertilisers.