Will Goods and Services Tax help in the doubling of farm income?

Will Goods and Services Tax help in the doubling of farm income?

News:

Article discuss about impact of Goods and Services Tax regime on agriculture sector.

Important Analysis:

• The agricultural sector continues to remain the largest contributing sector to the GDP with a share of 16%.
• The onset of GST has created national market for agricultural goods with a clear and hassle-free supply chain which would lead to the free movement of agri-commodities across India.
• Further, the promotion of the National Agriculture Market (NAM) by the Centre in accordance with the GST has created scope for increased transparency and impartial trade of agri-commodities without the restrictions of multiple taxation.
• Implementation of GST and the opening of foreign direct investment (FDI), especially in the food processing, has enabled the growth of the industry and raised market potential to grow over 12-13% percent in 2018.
• GST has helped the government in moving a step closer towards making the country a unified common market.

Positive impact of GST on Agriculture Sector:

• Improved supply chain mechanism – The tax regime has reduced the tax burden on the farming sector with the exemption on GST on storage and warehousing of agricultural produce and created an opportunity for farmers to sell the produce at the best available price and reduced the imminent storage-related food loss.
• Input Tax Credit – 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.
• Reduced Transportation time – Agricultural goods are perishable in nature and thus are often influenced by the amount of time taken in its transportation. The implementation is expected to boost the agricultural market as taxation under a subsumed single rate would make the movement of agricultural commodities hassle free
• Tax Exemption – GST being a consumption-based tax, it will be levied only when food products are sold by the manufacturer and not when they are manufactured unlike the earlier imposed excise duty.
• Reduced Interstate Tax – Government to drop the 1% interstate tax on stock transfers has reduced the amount of working capital required by companies.
• Easing Interstate Trading – Interstate trading of a particular product often is subjected to various taxes, permission, license required for different states at every point of their transaction which has often created hindrance in trading of products. So implementing GST would be the first step towards liberalizing the marketing of agricultural products and creating a smooth transaction of goods.
• Inclusion of more Agri product – GST has included tax related to trading in oilseeds, cereals etc. which previously were outside the tax structure and thus will benefit the consumers and processors by eliminating the negative impact of price on the trade of such products.

Negative Impact of GST on Agriculture Sector:

There are also speculations that implementation of goods and service tax would hike the price of agricultural products to between 0.61% to 1.18%

• Doubling tax burden:
  • Food items like meat, fish, poultry, grains, cereals, dairy products and milk, fruits, vegetables etc. were exempted from CENVAT and items like food grains and cereals were taxed at 4 percent under the state Vat. However, in current tax regime these food items are under purview of GST regime and highlighting the doubling of tax burden on the food sector.
  • For instance, there was no tax to procure milk from farmers. We only used to pay 2% Central Vat on sale of milk powder to a company. However, in GST regime, the tax can be 12.5% or 15% or 18%. There will be a straight cost hike in milk and milk product prices.
• Reverse Charge:
  • Most agri warehousing companies rent warehouses from small owners of the property. Such owners are likely to remain unregistered suppliers. However, such renting of warehouses by agencies engaged in providing storage and warehousing services is liable to GST under a reverse charge at the rate of 18 per cent.
  • The tax burden will inevitably be passed on to farmers in the form of higher price for storing goods. This will directly feed into the cost of agricultural produce.
• Modern infrastructure:
  • Earlier, imports of project equipment used to create facilities to store agriculture commodities like mechanized handling systems and pallet racking systems attracted only a basic customs duty of 5% and were specifically exempt from countervailing duty.
  • The same exemption has not been extended under GST. These imports now attract 18% IGST coupled with the existing 5% basic customs duty,
  • This will result in a spike in the cost of imported machinery, deterring the creation of modern agri infrastructure.
• Rise in cost of warehousing or cold storage construction
  • Earlier, most services pertaining to the construction of agri-storage infrastructure and food grain handling systems were exempt from service tax. With GST, the exemption list has been minimized.
  • The construction of warehouses as well as cold storages for agricultural produce are now liable to 18 per cent GST.

Way Forward:

• There is a need to extend GST exemption under reverse charge when the services are used to store agricultural produce.
• Secondly, the renting of immovable property for storage and warehousing of agricultural produce needs to be exempted from GST.
• Finally, exemption under the earlier service tax regime for construction of warehouses including cold stores, and exemption provided for import of project equipment used for agri-storage infrastructure, need to be carried forward in the GST regime.
• Unless correctives are immediately applied farmers will see a rise in storage costs, and investment in this sector will eventually increase the burden on the supply chain, contrary to the government’s objectives.