New Delhi: India’s landmark tax reform, the goods and services tax (GST), may not be good news for farmers. Retail prices of commonly used fertilizers and micronutrients are likely to increase, not only raising the cost of cultivation but also leading to imbalanced use of fertilizers.

Last week, the GST Council fixed a 12% rate on fertilizers, up from the current 4-8% rates, depending on raw materials used and in which states the products are sold. For urea, the most commonly used fertilizer, prices may go up by Rs300 to Rs400 per tonne. For other fertilizers such as diammonium phosphate (DAP) the hike in retail prices could be as high as Rs3,000 per tonne in states such as Punjab, Haryana and Uttar Pradesh, where there are no taxes at present on the farm nutrients, calculations by the fertilizer industry executives show.

The proposed 5% GST on road transport could further escalate retail prices as transport of fertilizers has been hitherto exempt from service tax. As most states did not levy any value-added tax (VAT) on micronutrients, organic manure and biofertilisers, the 12% GST rate will mean a rise in retail prices of these minor fertilizers.

“For urea, if the government wants to foot the bill it will have to bear an additional (subsidy) burden of around Rs1,000 crore, else retail prices will go up by Rs20 per bag (of 50kg each)," said a fertilizer industry executive who did not want to be named.

Urea prices are currently controlled by the government and fixed at around Rs5,630 per tonne.

The executive added that since prices of non-urea fertilizers have been decontrolled, the rise in retail price of a 50kg bag of DAP will be around Rs125 (currently it costs Rs1,000- 1,100 per bag), or a 10% rise in retail prices.

“This will take away the gains from the previous year when a fall in price of imported inputs led to lower retail prices of decontrolled fertilizers," the executive said.

“We were expecting the government to fix a GST rate of 5% which would have reduced the burden on farmers but that did not happen," he added.

More importantly, the GST regime, which will be enforced from 1 July, will likely widen the price gap between urea, which is heavily subsidized, and complex fertilizers such as DAP, forcing farmers to continue over-use of urea.

“Over the last decade urea prices went up by just 5% while DAP prices doubled," the person quoted above said.

Indian farmers tend to overuse urea as it is cheaper and highly subsidized, compared with other macronutrients such as phosphorous and potassium fertilizers, prices of which are not regulated.

The result is a declining response of crops to fertilizer use; the amount of foodgrain produced per kg of fertilizer applied declined from around 13kg in the 1970s to less than 4kg by 2010, according to fertilizer ministry data.

The government of Prime Minister Narendra Modi has sought to correct the imbalanced use of fertilizers by providing farmers with soil health cards, and by neem-coating urea.

GST could also lead other complications for fertilizer users. Inputs (ammonia and phosphoric acid) used by the industry are taxed at 18% under GST, but final products are taxed at 12% and the industry is not clear yet how refund provisions will work.

“It is also a logistical nightmare. We don’t know yet whether to raise retail urea prices or if the government will provide more subsidies (to companies)... the bags need to be labelled as the (Kharif) season is upon us," said a second executive, from another fertilizer company.

“It is easier for us to recover the rise in costs from farmers directly as subsidy payments are usually delayed," he added.

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