Key Update— GST Council Circular
The GST Council is set to provide much-needed relief to fertilizer companies by recommending the issuance of a circular to release refunds owed due to the inverted duty structure and subsidies. This move is anticipated to follow the upcoming general elections.
Understanding Inverted Duty Structure (IDS)
The inverted duty structure refers to the scenario where the tax rate on inputs is higher than that on outputs. For fertilizers, the GST rate is 5%, while essential inputs like ammonia (used in P&K fertilizer production) and packaging materials attract an 18% GST. This discrepancy leads to an accumulation of input tax credit, warranting refunds.
Subsidy Mechanisms
Fertilizer subsidies are governed by distinct policies:
- Urea Subsidy: Urea is sold to farmers at a government-notified Maximum Retail Price (MRP) of ₹242 per 45kg bag (excluding neem coating and applicable taxes). The government compensates the difference between the delivered cost at the farm gate and the net market realization by manufacturers/importers under the Nutrient Based Subsidy Policy.
- P&K Fertilizers: Subsidies for Phosphatic and Potassic (P&K) fertilizers are fixed periodically based on nutrient content. The market-driven MRP is set by fertilizer companies and monitored by the government.
GST Impact on Fertilizer Inputs
The 5% GST rate on fertilizers contrasts with the 18% GST on key inputs like ammonia and phosphoric acid, resulting in significant unutilized input tax credits. The Fertilizer Association of India (FAI) notes that under GST, government subsidies are excluded from the value of supply, meaning output GST applies only to the subsidized value. This leads to lower output GST in absolute terms compared to input GST credit, particularly for P&K fertilizers.
Legal Disputes and Industry Challenges
Fertilizer companies face accumulated input tax credits due to the subsidized value of outward supplies being lower than inward supplies and the higher GST rate on repackaging materials. Despite regulations allowing inverted duty refunds, inconsistencies in claims approval have led to legal disputes. The GST authorities have challenged these claims, particularly those involving government subsidies, resulting in multiple court cases and increased working capital burdens.
Expert Insights
Saurabh Agarwal, Tax Partner at EY, highlights the need for clarity and consistency in handling inverted duty refunds within the fertilizer sector. He asserts that the accumulation of input tax credits is not due to supplier or customer errors, and uniformity in refund processing is crucial for efficient working capital flow, ultimately benefiting businesses and consumers.
Conclusion
The anticipated GST Council circular for releasing refunds due to the inverted duty structure and subsidies is a significant step toward alleviating the financial strain on fertilizer companies. By addressing legal disputes and ensuring a consistent approach, this move promises to enhance the sector’s operational efficiency and support the broader agricultural community.