Virtual Dialogue- The Goods and Services Bill Act Impact on Agriculture
The GST is heralded as the biggest tax reform since independence, reforming the Indian taxation system through implementing a single tax on the supply of goods and services, replacing all the direct and indirect taxes currently implemented by the central Government and states. It is still not clear how the new GST regime will impact the economy in the short and long run.
Overall, it is expected that the GST will have far reaching implications on businesses and production in India through a change in India’s tax structure, incidence, computation, payments, compliance, credit utilization and reporting. It is expected that this tax reform will increase economic growth rates and will broadly have beneficial impacts on the Indian economy through supporting the development of a common Indian market, reductions in logistics and transaction costs, improving compliance and broadening the tax base, and reducing the cascading effect of tax on the cost of goods and services.
There were four main questions raised during the dialogue with the corresponding summary of comments:
The GST is expected to create a more seamless movement of agriculture produce between states and is expected that primary markets can respond quickly to the market signals avoiding local shortages and avoiding transportation costs of up to 3-5 percent depending upon the region and commodity. There is also the idea that this will help favor the e-National Agricultural Market (e-NAM) given that taxation on agricultural products will be simplified. The e-NAM will help in avoiding mandi fees and taxes and link farmers with buyers and improving market efficiency, hence benefiting both farmers and buyers. Both the GST and the e-NAM have a common goal to create an integrated national commodities market with a uniform tax structure for uniform market fees across the nation.
The press release by the GST Council on November 3, 2016 noted that the GST will be levied at multiple rates ranging from 0 percent, 5, 12, 18 to 28 percent with food grains exempted from the tax. The lowest taxes will go to several food items such as meat products, milk and dairy, and other processed foods. Purchase taxes, market fees (mandi taxes), and infrastructure development taxes will be incorporated into GST. It is expected that better compliance will help in widening the tax base and hence lowering the tax burden on average dealer in agriculture trade.
Participants agreed that market competitiveness will be improved, helping export markets. It is expected that uniformity across states and the nation will help in compliance and the new GST tax structure, and is expected to help protect the interest of small traders and hence attract more traders, boosting competition.
The impacts on production are unclear as it might dis-incentivize the farming community. The reduction in the number of tax-exempt products from 300 to 90 under GST may include some farm inputs that currently have tax exemptions and concessions; that might be increase in their price and hence impact the net income of the farming community. Seeds will continue to be exempted and IFPRI South Asia Director PK Joshi added that farm input subsidies will be targeted and directly transferred to the beneficiaries so the impact to inputs should not be great.
The tax on storage of commodities is still unclear and therefore, it is not known how this will impact production or trade. Sachin Sinha emphasized that for the food processing industry to fully leverage the growth potential, timely implementation of the GST along with lower rates can help via facilitate the timely flow of goods and raw materials.
Finance Commission Chairman Vijay Kelkar recently estimated that the GST will be mildly inflationary for agricultural goods, increasing prices by between 0.61 percent and 1.18 percent. For instance, milk products are currently subject to a 2 percent VAT rate, a GST rate of 18 percent will increase in the price of milk products directly. However, some estimates show that these price increases would be beneficial for millions of farmers. However, according to Naveen P Singh, this price increase will have minimum impacts on the poor as they will continue to remain supported through the Public Distribution System (PDS). It is also estimated that the GST will contribute to economic growth and support the creation of around 20 million jobs in the agricultural and non-agricultural sectors and bring down inflation.
The main impact from the application of GST on food would be for those at the bottom of the income scale for whom food accounts for an even higher proportion of total expenditures and incomes. Taxing food could thus have a major impact on the poor. By the same token, a complete exemption for food would significantly shrink the tax base. In India, while food is generally exempt from the taxes, many of the food items, including food grains and cereals, are subject to the state VAT at the rate of 4%. Exemption under the state VAT is restricted to unprocessed food, e.g., fresh fruits and vegetables, meat and eggs, and coarse grains. Beverages are generally taxable, with the exception of milk.
In the rural sector, the predominant distribution channel for unprocessed food would be either a direct sale by the farmer to final consumers or through small distributors/retailers. Further, the output from the agricultural sector is mostly exempt from tax and inputs in agricultural sector like power and fertilizer are heavily subsidized and will continue to be subsidized. The GST regime is mainly expected to boost and ease the interstate movement of goods as the GST has been labeled as a ‘destination-based tax’ meaning that goods and services will be taxed in states where they are consumed, by contrast, goods are currently taxed in states where they are produced.
Multiple participants in the dialogue noted that the GST may help facilitate and significantly increase the trade of goods and services within India. Bihar is the only state without the Agricultural Produce Marketing Committee (APMC) Act and has also welcomed the ratification of GST saying it will increase country-wide trade and state tax revenues since it has no organized market sector. The multiple layers of taxes with the supply chain will be clubbed into a single tax. The movement of goods and services will at ease across the states. For example, successful GST implementation is expected to eliminate the queues of trucks waiting at state boundaries. Indian businesses are generally supportive of the GST as it is expected to simplify their value chains.
Every supply chain will be affected by the new tax regime meaning that farmers will also be affected. However, the effect is not clear yet since the laws in the act exempt agriculturalists but the allied services might be affected and hence can impact agriculture. To best understand the system, farmers need to understand the documentation, system compliance, and use of information technology along with the digital transactions. There can be some resistance due to initial new system adjustments.
Allied businesses of agriculture might be affected more than agriculture itself that actually benefit. Experts noted that the central government should launch a program with the assistance of NAFED and NABARD to provide capacity building and information campaigns to make the transition easier for various states of India. The supply of labor will not be impacted since it will take long time to mainstream labor supply as formal markets but taxes on farm machinery will make a difference. For example, the government may consider applying the lowest category of the GST to agri-inputs (machinery) to reduce the cost of production. While NAM will explore the opportunities to strengthen the value chains, GST will shape the agro-processing industry. Mandi taxes will not be incorporated into the GST tax. They will co-exist with GST and be part of the regular tax. Assuming that post GST taxes on food commodities increase to 5% and there are additional mandi fees of 1.5-2% to even 4% in states of Punjab and Haryana it will add to tax burden.
The common food basket will be exempted from the tax and few items will be taxed at 5 percent with the government hoping to check the incidence of food inflation and ensure food security. Milk products and processed products are currently taxed at 4-4.5% but if they enter even in the lowest grouping under the GST of 5%, there will be an increase in prices. The impact of these changes is yet to be seen.
The implementation of the GST along with demonetization may require farmers to increasingly use banking channels and appropriate banking policies may be required to waive feeds and help low-income farmers access the banks. Costs of farm-related imports and agricultural-related commodities will remain the same in the new regime since the Basic Custom Duties (BCD) will be kept outside the realm of GST. However, Rahul Ganatra emphasized that there are some macro-factors that may also have implications on imports. For example, GST would result in inclusion of the entire eco-system of agricultural business into the economy and enabling a flow of investment for development of agricultural infrastructure. There may be a development and expansion of agricultural commodities processing leading to vertical integration by value chain participants to enhance value addition. It will effectively use the hedging (futures and options) platform given by the Commodity Derivatives Market due to better price discovery is efficient and is not impacted due to multiplicity of the tax structure reshaping commodity markets into more structured than pre-GST. Agricultural services may have taxes imposed post-GST.
There is significant debate across the political spectrum at what standard rate the GST should be set and which items to include and exclude. The opposition parties are advocating for a rate below the generally proposed 18 percent while some States are proposing to set it at 20 percent to ensure adequate revenue collection. A report for the government on how to ensure neutral revenue rates after GST implementation recommends a standard GST rate of 17- 19 percent for most goods and services, a 12 percent rate for some goods (including most agricultural goods) and a 40 percent rate for luxury goods.
The central government has clarified that all food grains and food commodities that go into the common food basket will be exempted from the tax and a few items will be taxed at the 5% percent level. It is not yet clear which items will be taxed and how that may affect nutrition.
The implementation of the GST is expected to significantly boost trade within India. As discussed above, the GST will eliminate the current multitude of taxes, duties, and surcharges that exist between states, thereby effectively creating a common Indian market. However, the taxes that will be imposed on the movement of goods are not clear. For instance, if goods move from producing states to consuming states, it is unclear which state will receive the tax benefits and how those benefits will be structured. However, ‘producing’ states are likely to experience a decrease in total tax revenues, and ‘consuming’ States an increase in total tax revenues, due to changes to where goods are taxed. It is hoped that the taxation of services by states will allow them to mitigate the expected shortfall in tax revenues.
The Central and State governments have joined hands to register for the new Goods and Services Tax Network (GSTN), a non-profit, non-governmental organization that will provide shared technological infrastructure. The key objectives of the GSTN are to provide a standard and uniform electronic interface to provide shared information technology infrastructure for all state government agencies.
It is expected that market signals will be clearer and food grains and other food commodities can move from surplus zones to deficit zones. This may help more traders participate and increase competition in the markets to respond to local food shortages. The GST system will help incorporate more accurate information on agricultural and food stock levels nationally and regionally, assisting with food security decisions. Perishables can move faster and cheaper due to less checks, paper work and taxes during transport.
The main concern in the application of GST to food is the impact it would have on those living at or below subsistence levels. Taxing food could have a major impact on the poor but a complete exemption for food would significantly shrink the tax base. In India, while food is generally exempt from the CENVAT (central value added tax), many of the food items, including food grains and cereals, attract the state VAT at the rate of 4%. Exemption under the state VAT is restricted to unprocessed food, e.g., fresh fruits and vegetables, meat and eggs, and coarse grains. Beverages are generally taxable, with the exception of milk.
It was noted that in the rural sector, the predominant distribution channel for unprocessed food would be either a direct sale by the farmer to final consumers or through small distributors and retailers. Even where food is within the scope of the GST, such sales would largely remain exempt because of the small business registration threshold. Further, the output of agricultural sector is mostly exempt from tax, and inputs in agricultural sector like power and fertilizer are heavily subsidized and will continue to be subsidized.
In effect, this means that ‘producing’ states are likely to experience a decrease in total tax revenues, and ‘consuming’ states an increase in total tax revenues, due to changes to where goods are taxed. However, it is hoped that the taxation of services by states will allow these states to mitigate the expected shortfall in tax revenues. Thus, the shorter-term and longer-term impacts of GST will be discovered in the near future. With the rollout planned to be next year on April 1, the important decisions rest on the shoulders of the GST council, regarding the GST rates. The capping of the GST at rate of 18 percent will not be favorable as it might lead to revenue deficits in some states.