India caps profit margin at 8-12% for makers of non-urea fertilizers

The Centre has introduced price capping formula for phosphatic and potassic (P&K) fertilizers with retrospective effect from April 1, 2023, through guidelines issued under the Essential Commodity Act for the manufacturers to mandatorily comply and regularly inform the government.

Under an office memorandum issued by the Fertiliser Ministry on January 18, the Director-General of the Fertiliser Association of India (FAI) has been asked to communicate the government’s decision to all the manufacturers of (P&K) fertilisers.

As per the guidelines, “differential profit percentage will be allowed for P&K fertilizer companies based on the category to which they belong – 8 per cent for importers, 10 per cent for manufacturers and 12 per cent for integrated manufacturers.” The government has said dealer’s margin will be allowed to the extent of 2 per cent of MRP for DAP and MOP and 4 per cent of MRP for all other grades (Complex, TSP, MAP, SSP, and PDM).

Resonableness of MRPs

Mentioning that these are detailed guidelines for the evaluation of the reasonableness of MRPs of P&K fertilisers under the Nutrient Based Subsidy (NBS) Policy, the Government order said that GST will be excluded from evaluation of reasonableness of MRPs.

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“Reasonability will be evaluated for all fertilizer grades for which subsidy is received by P&K fertiliser companies under NBS scheme on segment basis,” it said. Companies have been categorised under three segments -- integrated manufacturer, manufacturer and importers.

The basis of evaluation of the reasonableness of MRPs will be the total cost of sales which will be the cost of production/Import (except profit on self-manufactured intermediates for manufacturing finished fertilizers), administrative overheads, selling and distribution overheads (except promotional expenses), net interest and financing charges.

Further, total cost of sales will not include any interest beyond the net interest and financing charges, GST/IGST paid on inputs/imports of fertilizers which are eligible for input tax credit. But, the prescribed dealer’s margin will be permitted to be considered under cost of sales. However, promotion expenditure will not be qualified for deduction, the guidelines said.

The Fertiliser Ministry has said “companies will self-assess unreasonable profit earned by them based on cost auditor’s report along-with audited cost data approved by the Board of Directors (BOD) and refund unreasonable profit” to the government. The last day of refund (for the previous financial year) has been fixed at October 10 and any failure to meet the deadline will result in paying an interest of 12 per cent per annum on pro-rata basis on the refund amount. The interest will be calculated from April 1 of the prescribed filing year.

Coops should set up audit panel

“The cost auditor’s report along-with audited cost data approved by the BoD will have to be submitted online by October 10,” the Government said, adding that in case of non-submission of the report and data within deadline, further subsidy payment to the company will be stopped and a penalty @₹1,000 per day would be charged from October 11 till it is submitted.

Companies/cooperatives under NBS will set-up an Audit Committee (composition as prescribed in Companies Act, 2013) to review the cost auditor’s report, it said while exempting single super phosphate (SSP) and potash derived from molasses (PDM) units.

Not only that, the government has issued guidelines for the cost auditor to follow by stating these are required “in view of government’s vision of transparency and good governance”. The auditor has to check compliance by the company with all the policy parameters issued by Department of Fertilisers in relation to NBS scheme from time to time.

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Norms for auditors

Besides, the auditor will also check whether the company has used any other subsidised fertilizers in the production of P&K fertilizers under NBS scheme as it is not allowed.

The auditor is required to certify that the company has not earned any profit on self- manufactured intermediaries for manufacturing finished fertilizers, subsidy claims submitted are in line with NBS policy, production/import of P&K fertilizers figures submitted in IFMS and cost sheet are same.

Further the audit report should also contain imported goods (raw material/finished fertilizers) details (Bill of Entry, Invoice, Bill of Lading), any expansion/setup of new plant of fertilizers (including bio- and organic fertilizers), capacity utilization of plants and total raw material/intermediates such as rock phosphates, phosphoric acid, ammonia, natural gas, urea, potash consumed during the year in domestic production of fertilizers under NBS.

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