The International Food Policy Research Institute held a virtual dialogue on the impact of the Goods and Services Tax (GST) on trade and agriculture in India on November 30. The implementation of the GST is expected to significantly boost trade inside India (this topic has been previously discussed in a blog on the India Food Security Portal). 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. Experts that participated in the dialogue included the following:
- Purushotham, Adjunct Professor, CESS
- CA Sachin Sinha, Partner, Prakash Sachin & Co.
- Amit Pujara, Assistant VP, NCDEX
- Rahul Ganatra, NCDEX
- PK Joshi, Director, IFPRI-South Asia
- Devesh Roy, Research Fellow, IFPRI
A summary of the key questions that were discussed in the virtual dialogue are as follows and all of the comments for each question are available on the forum as well as a full summary.
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
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.
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.
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. 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.
A full summary is available here.
Written by: Jaspreet Aulakh