Agri Business

GST may stoke food inflation, but agri-value chain will gain in long run

Sanjay Kaul | Updated on January 15, 2018 Published on April 11, 2017

Agricultural activities will continue to be outside the ambit of direct taxes, while allied industries will come into the GST net.

With the Rajya Sabha passing four key GST bills, the Goods and Services Tax (GST) regime is all set to roll out nationwide from July 1. GST will be the biggest tax reform in recent decades. It is widely expected that GST will largely eliminate the high, cascading taxation structure. In this backdrop, it is worth tracking the impact of GST on the agri-value chain. This is especially important as the agriculture sector plays a significant role in both employment as well as in terms of its contribution to GDP (about 15 per cent).

Agriculture has broadly remained shielded from direct taxation. And though many food items are exempted from CENVAT, cereals and foodgrains are included in the State VAT. Restricted State VAT category takes unprocessed food such as meat and eggs, coarse grains, fresh fruits, and vegetables in its ambit.

Under the proposed GST regime, agricultural activities of “agriculturists” will be non-taxable, while allied industries, including contract farming, dairy farming, frozen foods, poultry and stock breeding, seed raising, food processing, among others, will come into the GST net. The government wishes to bring as many as transactions as possible under the GST umbrella. Indicatively, contract farming, which big retail chains go for in respect certain agricultural products for direct sale in retail markets, will attract GST now.

Middlemen and smaller retailers who trade in agricultural commodities may also come under GST. Farmers will not be required to get themselves registered to pay GST, but all those who buy products from farmers may be required to pay GST. Various farm items that were earlier out of the tax net will now come on the tax radar as the meaning of the term “agriculturist” has been narrowed. Accordingly, major tax exemptions have been brought down.

The direct impact of the widening of the ambit of agriculture and allied sector for purposes of taxation may, therefore, result in marginally higher Consumer Price Index (CPI) inflation of food products in the short term. An increase in the cost of agricultural consumer products is anticipated due to the rise in inflation, even if only for a brief period. Inflation will also be inevitable when VAT is replaced with a higher GST rate on many food items, including cereals, grains, and milk. Needless to say, those below the poverty line may be affected the most.

Industry associations have been pushing the government for a lower GST rate on processed foods to minimise food inflation; however, it is unlikely that they will see much relief.

However, the long-term impact of GST on agriculture is expected to be beneficial. Most of the indirect taxes levied on agricultural products, will be subsumed under GST, and this will enable free movement of commodities across the country by removing hurdles in the supply chain.

The hassle of transporting goods across State borders will significantly come down with the removal of octroi and entry tax. Since the bulk of agri-output is perishable, the cutback in the transportation time will benefit the chain by reducing transit losses and help reduce price asymmetries across the country. GST will subsume CST/Octroi/Purchase tax, which will mean that some States will need to be compensated for the loss of revenue from these sources. Customs duty will, however, not be subsumed in GST, and it will continue. The exemption from basic duty on basic agricultural produce like pulses will continue.

The ease of transportation of agricultural goods between States and the merging of taxes under GST will also be beneficial in creating a path for the successful rollout of a National Agricultural Market. Currently the different APMCs (Agricultural Produce Market Committees) and State VAT laws have created fragmented and asymmetric agricultural markets.

The full-scale implementation of GST, along with reforms in the APMC Acts, as envisaged by the Central government, will create an efficient transparent agri-supply chain, and, directly link farmers with buyers, benefiting both farmers and consumers.,

The writer is MD & CEO, National Collateral Management Services Ltd (NCMSL)

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Published on April 11, 2017
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