GST impact on food grains: It is win-win-win situation for traders, FCI and Centre

The goods and services tax (GST) has drastically reduced the tax rates on purchase of foodgrains in the country, besides correcting the wide disparities in the tax incidences among major grain-producing states. The development would reduce the tax burden on the state-run Food Corporation of India, the operations of which are funded out of the Centre’s subsidy budget. Also, procurers including private traders are now finding it easier to do business with grain-surplus states as tax liability is no longer a determinant of their market decisions. Earlier, taxes played a major role and affected traders’ purchase preferences. For example, even as Punjab has been one of the largest producers of wheat and often produced the grain in surplus quantities, private traders used to procure the grain from Uttar Pradesh, where the taxes were much lower. Such market-distorting tax disparities no longer exist under the GST regime. While VAT and assorted cesses are subsumed in GST (which is levied at zero on grain purchases), only some small levies like market fee, rural development fee and arthia or societies’ commissions are now paid by grain buyers.

In Andhra Pradesh, for instance, the incidence of taxes and other imposts on rice procurement is 3.12% now, compared with the pre-GST level of 13.12%. The southern state, which procures rice for central pool stocks, used to impose value-added tax (VAT) and rural development fee of 5% each on the grain purchase price, which had be discontinued under GST. Similarly, in Punjab, the taxes on rice and wheat purchases have declined from 14.5% to 6.5% while for Haryana the taxes have declined to 6.5% from earlier 11.5%. And in Madhya Pradesh, one of the key contributor to central pool wheat stocks, the taxes on grain purchase by both government and private agencies have come down to 4.32% from 9.32%.

“Besides VAT, various cesses such as infrastructure and rural development imposed by state governments on grain purchase got subsumed in GST,” an official told FE. The GST Council had resolved to fully compensate states for any revenue loss on account of GST in the first five years of operations. The reduction in taxes on grain procurement would help FCI, which purchases around 50-55 million tonnes of wheat and rice annually across key producing states. FCI had paid taxes to the tune of Rs 10,000 crore annually over the last few years and the savings due to GST could be around Rs 7,000 crore annually.

A recent reported titled “Getting Punjab agriculture back on high growth path” by Ashok Gulati, Ranjana Roy and Siraj Hussain has noted that the Punjab government charged heavy commission/levies/cess on the purchase of wheat and rice, amounting to 14.5%, which is much higher than the 2% in Gujarat and West Bengal. “This makes the food processing industry extremely reluctant to buy their raw material from Punjab,” the report said.“The state (Punjab) can emerge as a hub for units using wheat as raw material like flour mills, noodles and pasta manufacturing, biscuits and bakery, etc. But all these years, wheat-based processing units always felt unenthusiastic to buy wheat from Punjab due to very high taxes and statutory levies which touched 14.5%,” the report said.

 [http://www.financialexpress.com/economy/gst-impact-on-food-grains-it-is-win-win-win-situation-for-traders-fci-and-centre/795051/ August 5, 2017]