VAT breather for fertilisers

The Cabinet secretariat has proposed to categorise naphtha, fuel oil and LNG — key inputs for the fertiliser industry — as declared goods, and levy a flat 4% VAT on them. That is welcome as it will lead to a substantial reduction in the burgeoning fertiliser subsidy bill. Unproductive fertiliser subsidies — to the tune of a whopping Rs 17,253 crore in 2005-06 — have been a monumental drain on resources, and are unwarranted. The government currently pays the difference between the cost of production and retail prices of fertilisers as subsidies to manufacturers. Over the past few years, subsidies have risen alarmingly, no thanks to a surge in input costs abetted by high and multiple state taxes. Implementation of a uniform 4% VAT on inputs across states will lower the cost of production appreciably, thus reducing subsidies. Successive governments have refrained from hiking fertiliser retail prices in the face of intense and persistent opposition from political parties and farm lobbies. This needs to change. Since fertilisers are used mostly by affluent farmers with sizeable landholdings, there is no reason why retail prices should remain suppressed. To that extent, the supplementary proposal to allow state governments, who are unwilling to implement the 4% VAT, to add the quantum of state tax over 4% to the minimum retail price, is also welcome. Increasing fertiliser prices will, inter alia, help in reducing the subsidy bill.
Fertiliser subsidy reform is also crucially dependent on the rationalisation of urea pricing. Currently, it is the only fertiliser under the Group Retention Pricing (GRP) system, a cost-plus approach accounting for an increase in input prices among other things. This essentially means that plants using high cost naphtha and fuel oil as feedstocks get a higher subsidy package than plants using low-cost LNG. Phasing out GRP would incentivise switching over to cheaper LNG. This would, in turn, promote cost-efficient methods of production, encourage a more appropriately diverse fertiliser basket, improve productivity considerably and reduce the subsidy burden. Moreover, decontrolled urea imports and increased competition would promote efficiency in the production and use of fertilisers.


-- The Economic Times Editorial