Agricultural Economics Research Review 2018, 31 (2), 175-185DOI: 10.5958/0974-0279.2018.00035.6

GST in India: reflections from food and agriculture

Naveen P Singha*, Jaiprakash Bisenb, Venkatesh Pc and Aditya K Sc

aICAR-National Institute of Agricultural Economics and Policy Research, New Delhi-110012, IndiabICAR-National Rice Research Institute, Cuttack-753006, Odisha, India

cICAR-Indian Agricultural Research Institute, Pusa, New Delhi-110012, India

Abstract Goods and services tax or GST is an important fiscal instrument to ensure efficient, equitableand sustainable economic growth. India switched over to GST in 2017, bringing all economic activities,including those related to agricultural sector, under its ambit. Most agricultural services remain exemptedfrom GST, and tax rates on several inputs and commodities have been reduced. Tax rates on machinesand equipment used in dairy industry have marginally been reduced, while dairy products have beenbrought under tax net. Tax incidence machines and equipments used in agro-processing has increased.These changes in tax rates are likely to influence prices of inputs and their usage; adoption of technologiesand prices of agricultural commodities and thereby farm profits. In this paper, we have attempted tohighlight likely impacts of GST on input prices and cost of cultivation of important crops.

Keywords Goods and services tax, agro-inputs, dairy, poultry, processing

JEL classification Q1, R4, E6

1 IntroductionTaxation is an important fiscal tool for the governmentto contain macroeconomic imbalances and improveeconomic performance. The preference of direct overindirect taxation is axiomatic to the optimal design ofthe tax structures since these may influence differentlythe policy goals of efficiency, equity and sustainability.In the present parlance, the taxation of agriculturalincome is a matter of political and academicimportance, yet not operational. However, indirecttaxation on many agricultural inputs as well as outputsvia goods and services tax (GST) is the current reality.Bovenberg (1987) argues that the appetite for increasedfiscal revenue needs to be reconciled with the otherobjectives of economic policy, such as efficientresource allocation, equitable income distribution, andtrade competitiveness. In this context, GST maypossibly meet the revenue consideration as well as otherpolicy objectives, i.e. efficiency and equity.

In India, with the evolution of indirect taxation system,the tax base of excise duty has widened and the rate oftaxation has declined over time. Yet, the tax ratesremained high enough to make Indian products lesscompetitive in the global market. But, since theeconomic reforms initiated in 1991 the tax structurehas been rationalized in terms of exemptions, reductionin number of rates and widening of the tax base (Rustagi1998). Despite a fairly successful harmonization of thetariff, the excise duty structure continued to becomplicated. Chelliah committee suggested adoptionof value added tax (VAT), and it was adopted by thestate governments in 2005. With VAT, the revenue andstate autonomy in determination of VAT rates continuedto increase. These led to differential tax rates for thesame commodity, multiplicity of taxes, lack ofcompliance and conflicts between state governmentsand central endorsement of GST. Exclusion of servicesfrom VAT was also a major weakness (Bagchi 1997).To address the challenges/problems of VAT system, in2017 India switched over to GST; a destination basedtax on consumption of goods and services. It is levied*Corresponding author: naveenpsingh@gmail.com

176 Singh N P, Bisen J, Venkatesh P, Aditya K S

at all stages, right from manufacturing to finalconsumption with provision of tax credit at previousstage as a set-off. In nutshell, only value addition willbe taxed, and the burden is to be borne by the finalconsumers. It is considered to be a transparent andeffective tax system enhancing tax compliance andreducing the cascading effect of taxation.

With GST implementation, several ex-ante assessmentsof its impacts on different sectors of the economy havebeen made. Despite that, the policymakers,academicians, economic agents as well as common manremain skeptic about its real implications. In India,about 50% of the population depends on agriculturefor livelihood. The change in tax regime is expected toinfluence welfare of agricultural population. There areconjectures about the potential impacts of GST on inputdemand and prices of different agriculturalcommodities (Kelkar 2013; Gulati & Husain 2017;Gandhi 2016). With GST, the prices of freshagricultural produce may decline, while that ofprocessed food products including animal products areindicated to rise. However, there is no empiricalanalysis of the effects of GST on prices of agriculturalcommodities. GST will influence farm profits throughchanges in input costs and also output prices. In thispaper, we have made a modest attempt to provide apreliminary assessment of the impact of GST onagricultural sector. The specific objectives of this are:

(i) to assess the effect of GST on demand for variousinputs used in crop production,

(ii) to assess the changes in operational cost ofcultivation of major crops post-GST, and

(iii) to examine the likely effects of GST on agriculturaloutput, services and allied sectors.

The global experiences on GST provide a mixed pictureof its impact. Several southeast Asian countries (e.g.,Malaysia, Philippines, Singapore, Australia andThailand) have adopted consumption taxes, such asthe VAT or the GST based on value addition in the1980s and 1990s. Singapore introduced GST in 1994and experienced a sharp rise in inflation soon after.Australia implemented GST in 2000 and the prices ofmany goods and services increased as a result of theindirect tax reforms, although prices of somecommodities remained largely unchanged or evendeclined (Valadkhani and Layton, 2004). However, the

prices of most investment goods and services fell asthe embedded cost of previous indirect taxes onbusiness inputs was removed. Malaysia implementedGST in April 2015 and experienced a sharp spurt intax collections, but inflation rose and cost of livingwas negatively impacted. As a result, Malaysia hasabolished GST on May 16th 2018 (Anonymous, 2018).The Philippines and Thailand experienced a reductionin gross domestic product (GDP) by 16.43% and7.90%, respectively after implementation of GST(Venkadasalam, 2014).

New Zealand (adopted in 1986) and Canada (adoptedin 1991) also experienced a sharp rise in inflation post-GST. However, the inflationary impact faded awaysoon. The Canadian experience on GST suggests thatthe conflict between provincial governments andfederal government increased after its implementation,and later the states were allowed to administer theirown VAT alongside the federal GST (Singhal, 2016).Brazil had a mixed experience owing to multiple ratesand weak tax administration/coordination at central andstate levels (Singh 2016). According to a Crisil report,when implemented in many countries, the GST causeda sudden spike in inflation lasting for about a year (TheHindu 2014). However, duration of the impact on retailsales varied, with consumers’ spending growthnormalizing within three months in Japan, Australiaand China, and twelve months in Singapore.

Notwithstanding these experiences, Chadha (2009) hasargued that ‘implementation of a comprehensive GSTin India would lead to efficient allocation of factors ofproduction resulting in gains in GDP and exports. Theprevious multiple tax structure was not conducive toaccelerated economic development, and discouragedinvestment by multinational as well as domesticplayers. The GST with minimum tax laws ensuresefficiency, equity and simplicity in tax structure, andcan attract significant private investment (Mrityunjay,2010). Mukharjee (2015) argues that GST wouldremove the cascading effect of taxes and provide acommon nation-wide market for goods and services.According to Parthasarathi (2015), if constructedappropriately the GST makes tax administrationtransparent and revenue productive. It removesdistortions in business production decisions byeffectively taxing only the consumption. Kelkar (2016)is of the opinion that, the introduction of GST is an

GST in India 177

important reform which would lead India into the nextrapid phase of economic growth. Leemput and Wiencek(2017) have estimated that GST would raise overallwelfare1 by 5.3% in India and enhance the real GDPby 4.2% through expansion of trade. Vasanthagopal(2011) and Poddar & Ahmad (2009) have also indicateda positive impact of GST on GDP.

2 Data and methodologyData on tax rates (on different agricultural inputs andservices, and output) in different tax regimes (i.e.,excise, VAT and GST) have been compiled from thewebsite of Central Board of Indirect tax and Customs(CBIC) (www.cbic.gov.in) and VAT schedules of thestates, mainly Punjab, Uttar Pradesh, Madhya Pradesh,Maharashtra and Karnataka. Data on cost of cultivationof important cereals, pulses, oilseeds and cash cropswere compiled from the website of the Directorate ofEconomics and Statistics (DES), Government of India(http://eands.dacnet.nic.in/Cost_of_Cultivation.htm),and averaged for all India. Data on seed replacementrates have been obtained from seed net portal ofGovernment of India (https://seednet.gov.in) and allIndia price of paddy seeds have been obtained fromDirectorate of Agriculture and Food Production, Odisha(h t tp : / / ag r iod i sha .n i c . i n / con ten t /pd f /Agr iculture%20Statistics_2013-14.pdf). The data on costof cultivation pertain to 2014-15, and were re-calculated with GST rates on different goods andservices.

To draw a logical conclusion on costs we have madefollowing assumptions after an in-depth analysis of taxrates on different agricultural goods and services beforeand after GST implementation: a) GST would not affectthe labour charges, irrigation charges, interest rates,cost of seeds; b) a 2% decline in tax on fertilizers andc) 5.5% increase in tax on insecticides (agro-chemicals)after GST.

3 Results and discussion

3.1 Effect on input demand

Agricultural production is a function of inputs, and isinfluenced by physical and policy environment amongothers. Hence, a change in any of these has repercus-sions for the whole agricultural production system.

Until 2017, the country was under the excise andvariable VAT regime of indirect taxation withdifferential tax rates on commodities across states. Inthis context, GST has some influence on the costs ofagricultural inputs and services as well as on the policyenvironment in which the inputs, services and outputof the agricultural system are being transacted.

3.1.1 Seeds for crop production: The seeds of crops,exclusively for the purpose of sowing, were neithertaxed in earlier regime nor in the GST regime (Table1). Also, the seeds were neither categorized as brandedor unbranded in any of the regime. However,information asymmetry about tax rates has led to theemergence of the lemon market (Akerlof, 1970) in agri-input chain that led to illegitimate taxation of 5% onbranded seeds after GST implementation.

States like Uttar Pradesh, Bihar, Jharkhand,Madhya Pradesh and Chhattisgarh have beenpromoting hybrid rice (Mitra, 2017). Assuming 3million hectares under hybrid rice as reported inVadlamani (2016), the seed rate as 20 kg/ha, the allIndia seed replacement rate for hybrid paddy as 100%and cost of seeds as Rs. 2597 per quintal, we find thatfarmers will have to incur an additional Rs. 0.2 millionon seeds alone. Similarly, most vegetable seeds arehybrids. Assuming the seed replacement rates for self-pollinated crops, cross-pollinated crops and hybrid as25, 40 and 100% respectively, the higher price forhybrid seeds would negatively affect their demandadversely. However, the demand for self-pollinatedcrops would be the least affected as the farmersgenerally grow home produced seeds.

3.1.2 Fertilizers: Before implementation of GST,fertilizers industry had rejoiced the exemptions/concessions that led to 5-10% tax on the value offinished fertilizer products (Chander, 2015). Assumingan average rate of tax of 7% on fertilizers before GST,the overall tax on fertilizers has decreased by 2% post-GST implementation, leading to a decline in fertilizersprices. The price of Urea, Diammonium Phosphate(DAP) and Muriate of Potash (MOP) has witnessed adecline of Rupees 233, 974 and 533 per tonne,respectively. As the share of fertilizers is high in thecost of cultivation the reduction in their prices mayincrease their usage.

1 Welfare effect was estimated taking into account the domestic and international trade barriers without and with GST.

178 Singh N P, Bisen J, Venkatesh P, Aditya K S

Table 1. Tax rate on important agricultural inputs

Agricultural inputs Pre-GST rates (%) GST ratesUttar Maharashtra Karnataka Madhya Punjab Central (%)

Pradesh Pradesh

Seeds Unbranded Exempted Exempted 0 0 0 Exempted ExemptedBranded Not defined Not defined - - - Not defined Not defined

Organic Unbranded Exempted Exempted - 0 0 Nil 0manure Branded Not defined Not defined - - - Not defined 5Chemical NPK Exempted 6 5.5 5 0 12.5 5Fertilizers Bio-fertilizers 4 6 5.5 0 0 Not defined Not defined

Micronutrient 4 6 5.5 5 0 Not defined 12Plant protection chemicals 4 6 5.5 5 0 12.5 18(Insecticides, rodenticides,fungicides, herbicides, anti-sprouting)Plant growth regulators 4 6 5.5 5 0 12.5 18

Source: Author’s compilation from state VAT schedules and central excise schedule.

Indian soils are deficient in micronutrients (Rego etal. 2007; Singh 2008). Alloway (2004) and Singh(2009) have confirmed deficiency of micronutrientsin rice-wheat based cropping systems. Beforeimplementation of GST, the tax rates on micronutrientsvaried across states, but were lower than the tax ratesafter GST implementation (Table 1). The inflated priceof micronutrients ranging from 0 to 12% due to theirplacement in 12% tax slab may act as a deterrent totheir usage. Similarly, the increased taxes on liquidfertilizers by 5.5% would lead to an increase in thecost of production.

3.1.3 Plant protection chemicals and growthpromoters: The plant protection chemicals and plantgrowth regulators are widely used in crop production.The GST at the rate of 18% on these (Table 1) wouldinflate pesticide cost by 0.5 to 5.5% in different states.The increased cost of pesticides would discourage theirexcess use.

3.2 Effect on demand of farm machinery andequipment

3.2.1 Land preparation machinery and equipment:According to Babu (2015), the level of farmmechanization in India is 40% and driven mainly bytractors for land preparation (Goyle, 2013). Post-GST,the tax burden on the tractors has declined by 4.5 to6.5%. Assuming the existing price of a tractor at Rs5.5 lakhs tractor, post-GST it would decline Rs. 24750

to 35750. GST would be an important driver to promotefarm mechanization. The labour scarcity has promoteduse of cultivators, rotavators, harrows, seed drills andother tractor-mounted and power-driven equipments.These equipments have been taxed at 12% post GST,hence we expect an increase in their prices. Overall,we anticipate that GST would not affect farmmechanization to a large and longer extant.

3.2.2 Water lifting devices: Earlier, irrigation pumpswere taxed at 16.5-18.5% in different states while thesehave been taxed at 12% in GST system. Dependingupon the brand and specifications, the prices ofelectrical, oil-operated centrifugal and submersiblepumps are expected to decline by Rupees 250 to 500per horsepower. This may encourage additional areaunder irrigation. Madhya Pradesh, Maharashtra andKarnataka are expected to benefit more (Table 2).Lakkakula (2017) has reported that the tax rate onmicro-irrigation devices (drip and sprinkler) hasincreased from 5% to 18%; hence their demand wouldbe negatively affected, unless offset by subsidies orplacement in lower tax slabs.

3.2.3 Harvesting machinery: The machines likereapers, movers and harvesters did not attract anycentral excise duty but were taxed by the states (Table2) in the pre- GST regime. In the new regime, theseattract a tax 12%, higher than the earlier. Although,GST has led to an upward revision in the prices ofharvesting machines but also promoted uniformity in

GST in India 179

Table 2. Tax rate on important equipments and machines

Equipments and machinery Pre-GST rates (%) GST ratesUttar Pradesh Maharashtra Karnataka MP Punjab Centre (%)

Irrigation (Electrical pumps 4 6 5.5 5 4 12.5 12and oil engines)Land preparation Manually Exempted 6 0 0 0 Nil 12

operated/ AnimaldrivenPower-driven Exempted 6 5.5 5 0 Nil 12

Plant protection (Sprayers, Exempted - - 0 0 - 12duster, power- operated sprayers )Harvesting and threshing equipment 4 6 5.5 0 0 Nil 12(Reaper, mover & harvester)Tractor & power tiller 4 6 5.5 5 4 12.5 12Solar panel/module - - - - - 12.5 5

Source: Author’s compilation from state VAT schedules and central excise schedule.

their prices across the country. However, the effect ofan increase in their prices would vary based on theprevious tax rates in the states.

3.2.4 Plant protection equipments: Plant protectionequipments such as sprayers, dusters (power-operated/manual) and sprayer-cum-rotavators were exemptedfrom tax earlier. However, the GST of 12% on thsewould increase the fixed cost for the farmers.

3.2.5 Renewable energy devices: Solar cells (whetherassembled in module/ panel) were taxed at 12.5% priorto GST, but could be exempted on approval ofrenewable energy projects by the Ministry of New andRenewable Energy (MNRE). Taxing the solar cells at5% (without any exemption and concession) underGST may negatively affect the efforts of promotingrenewable and clean energy usage.

3.3 Agricultural services

In general, the agricultural services can be categorizedfarm-related services (which are directly or indirectlyrelated to agriculture) and agricultural researchservices. Either of the services were non-taxable earlier.However, in the new taxation policy, some of theagricultural services also attract service tax and hencetheir prices are bound to rise.

3.3.1 Farm-related services: Tax on some of theservices does not get affected after GST. These servicesinclude agricultural production operations which makes

agricultural produce marketable without altering itsessential characteristics, renting of agro machinery orvacant land with or without a structure incidental to itsuse, secondary marketing functions, agriculturalextension services, services provided by anyAgricultural Produce Marketing Committee (APMC)or Board or services provided by a commission agentfor sale or purchase of agricultural produce, credit andinsurance etc..

3.3.2 R&D services: The research and development(R&D) services attract GST of 18% that would increasethe cost of research and development in agriculturalsciences, and subsequently the cost of development oftechnologies. The private sector that has monopoly inmany technologies would transfer tax burden tofarmers. For example, private seed companies dominatethe seed chain of Bt-cotton and vegetables in India.

3.3.3 Warehousing and cold storage: Taxation onstorage and warehousing of agricultural producemaintain status quo. However, the cost of constructingnew warehouses may increase because the inputs usedfor construction of warehouses are subjected to GSTwithout any corresponding opportunity to claim inputtax credits as most warehouses are privately ownedand an unregistered supplier of service. On the otherhand, imports of equipments for warehouses that wereearlier exempted from countervailing duty and specialadditional duty would now attract 18% integrated GST(IGST)2 coupled with the existing 5% basic customs

2 IGST: Integrated goods and services tax, which comprises of central goods and service tax (CGST) and state goods and servicetax (SGST).

180 Singh N P, Bisen J, Venkatesh P, Aditya K S

duty (BCD).

3.4 Agro-processing

In a study by the Central Institute of Post-harvestEngineering and Technology (CIPHET), the value ofharvest and post-harvest losses in major agriculturalproducts amounts to Rs. 92,651 crores annually (Jhaet al. 2015). This is almost three times of the budgetfor agriculture in 2016-17 (Molony, 2016). Agro-processing is thus important to minimize post-harvestlosses.

Post-harvest processing takes place at three distinctlevels viz. farm level processing, primary level forprimary processing and secondary level for secondaryprocessing. Cleaning, sorting or grading the seeds,grains, vegetables, fruits, eggs, processing of cerealstakes place at farm level, which is prerequisite forprimary processing i.e., rice into flour, pulses into dal,oilseeds into oil. These operations at farm as well asprimary level are assisted by machines. Likewise, thecommercial poultry uses incubators and brooders andcommercial dairy makes use of milking machines,coolers etc. Most primary processing machinery wasout of the tax ambit before GST, but now has beentaxed at a rate of 5% or 12.5%. This may hinder newerinvestments in primary processing at farm level andtherefore depriving farmers from benefits of valueaddition.

The secondary processing of agricultural produce ispicking up. New startups are mushrooming, e.g.,bakeries, confectionaries, packaged food processorsand ready to serve. On the other hand, only about 2%of fruits and vegetables (Bung, 2012) and about 7% ofcereals are processed. It is important that secondaryprocessing in agriculture should be promoted throughtax incentives.

3.5 Dairy and fishery

3.5.1 Dairy: During pre-GST regime, the grass, hay,straw, concentrate, oil cakes, and feed from foodindustries were exempted from the central levies. Now,oilcakes and other solid residues are taxed at 5%. Onthe other hand, a 1% reduction in tax on veterinarymedicines in the GST regime may lead to reducedexpenditure on veterinary medicines.

On the output front, due to the relatively elastic demandfor dairy products, higher taxation on the processed

dairy products may negatively affect their demand. Itis further apprehended that the consumers (with elasticdemand for processed and packaged dairy product) maysource their requirement from the unorganized sector.

3.5.2 Fishery: With the implementation of GST, fisherysector may face initial hiccups as the fishing tools, aswell as some of the aquatic products, have subsumedunder the tax net. Fishing hooks, fishing rods, fishingtackles, and fishing twines which were earlier exemptedfrom taxes are now taxable at 12% and fishing ropesare taxable at 18%. However, the tax on fishing vesselsmaintains status quo at 5%. Outboard motors and iceboxes which were taxed at 14.5% in the earlier regimenow attract a GST of 28% and 18%, respectively. Sincemost of the fishermen are unorganized they will haveto incur additional cost on inputs disdaining fromavailing any input tax credit. On the output front, manyprocessed aquatic products, like dried/salted/smoked/chilled/frozen fishes, molluscs, crustaceans and aquaticinvertebrates which remained outside the tax ambitearlier, are now taxable at 5%, but fresh aquaticproducts remain outside the tax net after GSTimplementation. Increased tax burden on processedaquatic products would render them less competitivein domestic as well as in international market.

3.6 Commercial and plantation agriculture

Earlier, plantation crops were exempted from thecentral excise duty, except tea. States like Karnataka,Tamil Nadu and Kerala the major growers of plantationcrops, used to levy a net tax of 2% on these. But now,fresh tea, coffee, cotton and jute are non-taxable. Thenatural rubber attracts 5% tax and the processedproducts of natural rubber attract diûerential tax ratesas per their usage.

3.7 Marketing and trade

3.7.1 Agricultural logistics: Indian logistics industryis fragmented and underdeveloped. Logistics costs arerelatively high. Poor physical and communicationinfrastructure, high dwell time at ports, low levels ofcontainerization, and a multi-layered tax systemcontribute to significant delays at border crossingpoints. Prior to the implementation of GST, of thetotal time taken by a truck from source to reachthe destination used to take 65, 20, 10 and 5% of thetime in running, border checkpoints, congestion andtolls, respectively. The average distance travelled by

GST in India 181

the truck was about 225 km per day as against thedistance of 600 km in western countries (Garg 2017).In the pre-GST regime, the suppliers have to maintaintheir warehouses in different states that further addedto delay in the delivery time for goods.

GST is expected to promote scale distribution ofcommodities by switching to hub-based distributionmodel instead of location-specific warehousing

models. This would reduce transaction time as well ascost and thereby improve supply chain efficiency.Facilitation of cross-border trade would also increaseconnectivity between markets by reducing the time onborder checkpoints and tolls by 3-4 hours (Ahmad etal. 2018) and thereby promises increased conveyanceefficiency by curtailing down the transportation cost.Due to time saving at border check points the runtimeof carriers by 75 to 100 km per day.

Table 3. Degree of market distortions in different states of India in the pre-GST period

States Sale tax (%) Tax (as % of Remarksminimum

support price)

Andhra All commodities (except maize, jowar, ragi, bajra, -Pradesh coarse grains): 4Bihar 3Assam All commodities (except rice, wheat, plum, fruits Not collected due to

& vegetables, fish, gaur, atta, maida etc.) 4-8 underdeveloped marketsChhattisgarh 2.20Delhi Fruits & vegetables: nil, oilseeds: 3, methi: 7Gujrat Spice: 3, aniseed, isabgoal, cumin and ajwain: 2, cotton: 4 0.80 The agricultural

commodities exemptedfrom sales tax. Octroi:0.2-4%

Goa Betelnut & cashewnut: 2, coconut, fruits & vegetables, Entry fee: cattle - Rs. 10/cattle and milk exempted from sales tax head, vehicle - Rs. 10/

truckJharkhand 1Haryana Fruits & vegetables: nil, foodgrains, pulses and oilseeds: 4 11.5Himachal 5PradeshKarnataka Foodgrains: nil, pulses: 2% and oilseeds: 4 Market fee exempted for

industrial and exportpurchases

Kerala 4-8 No prescribed charges asstate lacks marketregulations

Madhya NA 9.2 Development cess fromPradesh traders only: 1-5%Maharashtra All agricultural commodities are exempted from sales tax 3.8 Entry fee: Rs. 10/truckPunjab 14.5Rajasthan Fruits & vegetables and coarse grains: nil, pulses and 15 % surcharge on sales

oilseeds: 2, foodgrains: 4 3.6 taxTripura For agricultural commodities: nil Entry fee: Rs.1/headUttar Pradesh Pulses: 2, foodgrains, oilseeds and others: 4 16.71Uttarakhand 7.5West Bengal NA 2.5 Purchase tax: Jute-4%

182 Singh N P, Bisen J, Venkatesh P, Aditya K S

Table 4. Tax structure and provision of input tax credit for imports and exports

Scenario Type of supplyExport Import

Tax Structure Zero-rated supply IGST and BCD shall be leviedInput Tax Credit (ITC) ITC allowed ITC of IGST is allowed but not for BCD

3.7.2 National Agricultural Market (e-NAM): Oneof the objectives of GST is to have a uniform tax ratefor goods and services across the country. Hence, GSThas strengthened the functioning of NationalAgricultural Market (NAM) that aim at an integratedsystem of the market of agriculture produce at thenational level, allowing a free flow of agriculturalcommodities across states. The taxes applicable onagricultural trade in addition to the market fee alsovaried from state to state prior to GST. The states haddifferent tax rates for the same commodities (Table 3).Variations in market taxes/cess were applicable ondifferent commodities in different states led to marketdistortion (Garg, 2015). GST has led to subsuming ofstate entry tax and octroi duty. Thus, GST will reducetransit time; curtail wastage of perishable food itemsby easing the interstate movement of agriculturalcommodities that would improve marketing efficiency,and reinforce the spirit of the national agriculturalmarket (NAM).

3.7.3 International trade: Agriculture trade constitutes13.2% of total exports and 7.1% of total imports ofIndia (GoI, 2016). The external and domestic trade ofagricultural commodities is interlinked and hence theirprices. The import of goods/services attracts GST inthe form of integrated goods and services tax (IGST)as it has been considered as interstate commerce. Inaddition to IGST, the basic customs duties (BCD) arealso levied on all the imports. However, the export iszero-rated, that means an exporter can avail theprovision of input tax credit (ITC) and need not paytax for exports. On the other hand, the importer canavail the ITC facility for IGST and not for BCD (Table4). Therefore, the new taxation policy is exportencouraging and import discouraging for the country.

3.8 Input tax credit and agro-processing

GST is unique of all the previous taxation systems inthat it contains the provision of input tax credit in it. Inthe agriculture sector, the utilization of ITC at farmers’

level is practically impossible as the agriculturaloperations have been exempted from GST and therebythe farmers need not register under goods and servicestax network (GSTN). An agro-processing firm cangainfully utilize the provisions of ITC if it qualifiesfor the registration or if voluntarily registered underGST. However, there exists a myriad of technicalimpediments on the utilization of ITC. These include,the person or firm has to be registered under GSTN;the registered firm or person must have paid taxes oninputs to the supplier and his supplier must haveupdated the information on GSTN; claiming of ITCwould be impossible if the processor draws his inputsdirectly from the farmers or unorganized suppliers;cross-utilization of ITC is not possible (i.e. ITC onSGST can’t be claimed against IGST and vice versa);literacy of the registered users about the ITC utilizationand so on that would affect the effective utilization ofthe ITC.

4 GST and cost of cultivationGST will influence cost of cultivation via changes inprices of inputs and usage thereof. We compared costof cultivation of important crops for the year 2014-15with and without GST (Table 5). The operational costconstitutes about two-third of the total cost, and anychange in it will have a direct bearing on farm profits.The average cost of fertilizers, irrigation pumps andtractors has been declined by 2, 5.5 and 5.5%respectively, while the average cost of insecticide hasinflated by 5.5%. Under the following assumptions: a)GST would not affect the labour charges, irrigationcharges, interest rate, cost of seeds; b) 2% decline intaxes on fertilizers and c) 5.5% increase in tax oninsecticides (agro-chemicals) after GST, it can beinferred that, had there been GST in 2014-15, the costof cultivation of crops like paddy, wheat maize, gram,soybean, groundnut, sunflower, rapeseed and mustard,cotton and sugarcane would have been less.

GST in India 183

5 Conclusions and policy implicationsGST is a significant development in the indirecttaxation system and is a logical step towards acomprehensive indirect tax reform in India. It isexpected to increase the tax revenue of the governmentby eliminating the evils of the excise and VAT regimeand increase transparency, compliance and efficiencyof the system. In a scenario where about 87% of thefarmers are small and marginal and about 48.9% ofthe total population depends on agriculture, additionaltaxation on important agro-inputs would lead to anextra burden on the individual farmers. Similarly, hightax rates on some of the agricultural equipments,machineries and their accessories would also act as animpediment to the farm mechanization which is about40% as against 95% in the USA, 75% in Brazil andArgentina, 80% in former Soviet Union etc. On theother hand, the R&D services are also placed in a highertax slab which further seeks attention for revision ofdecision when India is lagging much behind the wordin agricultural productivity. The present indirect taxreforms although have positive implications for theagricultural sector as a whole but would also makesmaller and marginal farmer’s pocket lighter. Thus, thegovernment needs to address the concerns of theagricultural sector to put it on a sustainable growthtrajectory and also to achieve the ambitious mission of

doubling farmer’s income by the year 2022. Therefore,this study recommends following suggestions:

• Reduction in rate of taxation on micronutrientfertilizers and liquid fertilizers to promotecommercial farming,

• Revision of tax rates on research and developmentactivities and include the R&D activities undernegative list of taxation,

• Reconsideration of tax rates on importantagricultural machineries to promote mechani-zation of small and marginal farms,

• Decrease in tax rates for processing machineriesto encourage the primary processing at farm level,

• Inclusion of renewable energy devises foragricultural purpose in negative list of taxation topromote their usage in agricultural sector,

• Create awareness among the producers about thetax rates on different agricultural inputs to breakthe information asymmetry and vandalize thelemon market.

AcknowledgementAuthors are grateful to Dr. Pramod K Joshi, Director-South Asia, International Food Policy Research

Table 5. Effect of goods and services tax on operational cost of crops (Rs/ha)

Crop groups Major crops Operational costWithout GST With GST % Change

Cereals Paddy 40124 40055 -0.170Wheat 28084 28012 -0.254Maize 35400 35310 -0.254

Pulses Arhar 24569 24567 -0.007Gram 20113 20096 -0.083Moong 16612 16591 -0.129

Oilseeds Soybean 24943 24843 -0.404Sesame 18971 18951 -0.103Groundnut 42815 42734 -0.190Sunflower 21625 21558 -0.308Rape and Mustard 23755 23694 -0.258

Cash crops Jute 45682 45638 -0.096Cotton 50953 50899 -0.107Sugarcane 90553 90320 -0.258

Source: Authors’ calculations.

184 Singh N P, Bisen J, Venkatesh P, Aditya K S

Institute, New Delhi, and Dr. D R Singh, PrincipalScientist, Division of Agricultural Economics, ICAR -IARI, New Delhi for their suggestions on an earlierdraft of this paper.

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Received: 30 December 2017; Accepted: 15 September 2018