India’s urea retail price poised to rise by 10% on reformed tax regime

KOLKATA (ICIS)–India’s retail price of urea is expected to increase by at least 7-10% under the proposed reformed indirect tax regime to kick in from 1 July 2017, officials in two fertilizer companies said on Tuesday.

The rise in urea’s retail price will be in the range of India rupees (Rs) 300-400/tonne ($4.60-6.25/tonne) under the new Goods and Services Tax (GST) being introduced by the government.

New Delhi has placed urea under the 12% tax slab against industry expectations that the key farm input will be slotted in the lowest tax slab of 5%.

The new indirect tax regime aims to unveil a “One India, One Tax’ with single rate of tax for each goods and services.

Under the GST, all goods have been put under four tax rates of 5%, 12%, 18% and 28% while bulk of services would attract a standard rate of 18%. All provincial levies, duties, taxes will be subsumed within these tax rates.

The officials pointed out that at present, incidence of indirect tax on urea ranged between 4-8% depending on feedstock used, and province where the fertilizer was being sold.

Even though the different local taxes will be subsumed in the proposed 12% rate, the latter was too high and the net impact will increase retail sale price by at least 10%.

Apart from the impact on retail price of urea, fertilizer companies were concerned as there was not clarity yet on whether the higher tax incidence would be reimbursed by the government to producers as urea was under government subsidy regime,.

The issue is under discussion between fertilizer companies and department of fertilizer.

Retail urea price was fixed by the government at Rs 5,630/tonne ($88/tonne) and the government reimburses the difference between higher cost of production and lower retail price to fertilizer companies.

Following the imposition of 12% tax under GST, fertilizer companies have estimated that the government will have to pay out an additional $10m per year as subsidy if current retail price was to be maintained,

Under the new tax scheme ammonia – used as an input to make urea- was proposed to being taxed at 18% while finished product urea is being taxed at 12% resulting in a inverted duty structure.

A rationale for indirect tax should be that the raw material should attract a lower tax than finished product, the officials said.

The estimated rise in retail price did not factor in the increase in production costs resulting from higher tax on ammonia, nor has there been any government clarification whether such increase in production cost would be calculated while working out subsidy reimbursement from the government to fertilizer producers, the officials added.