Lok Sabha Secretariat (LARRDIS) New Delhi

“Tax Structure on fertilizers sector in terms of GST and import duties analysis of the LARRDIS

tax structure of raw material and final products and its impact on self-sufficiency and use of fertilizers” NOVEMBER 2020

Lok Sabha Secretariat

(LARRDIS)

New Delhi

BACKGROUND NOTE

ON

“Tax Structure on fertilizers sector in terms of GST and import duties

analysis of the tax structure of raw material and final products and its

impact on self-sufficiency and use of fertilizers”

(For the use of the Standing Committee on Chemicals and Fertilisers)

November 2020

____________________________________________________________________________

The brief note is intended to serve only as a background aid to the Standing Committee on Chemicals

and Fertilisers. It is for restricted circulation and not for publication in any form.

[Prepared by the Educational & Scientific Affairs Wing of the R&I Division. Officers associated with

the preparation - Babulal Naik, Additional Director;Ms. Namita Kumari, RO; supervised by Shri

Pradosh Panda, Director. Feedback is welcome and may be sent to [email protected]]

mailto:[email protected]



Introduction

India will surpass China as the world’s most populous country by 2027 and

by 2050, India will have a population of 170 crore (1.7 billion). Requirement of

food grains by 2050 will be 400 million tonnes against the current production of

285 million tonnes. India has to grow more and more food from shrinking

agriculture land. Thus, food security of the ever-expanding population will remain

an important national agenda for our country. Fertilisers have played a key role in

the success of India’s green revolution and subsequent self reliance in food grain

production. The increase in fertiliser consumption has contributed significantly to

sustainable production of food grains in the country. As a result , the demand of

fertilisers has witnessed double digit growth rates over the past several year.In

view of huge requirement of nutrients, the total nutrient needs of Indian soils

cannot be met only through organic and bio sources. This is particularly true in

view of inadequate availability of organic manures and very low levels of nutrient

content in the organic fertilizers. Chemical fertilizers will thus continue to play a

major role.1

Chemical fertilizers have played an important role in making the country

self‐ reliant in food grain production. The role of Government of India has been

significant as the Government has been consistently pursuing policies conducive to

increased availability and consumption of fertilizers at affordable prices in the

country.Requirement of total fertilizer nutrients is estimated to be around 60

million tonnes by 2050 (comprising of 45 million tonnes of chemical fertilizers and

15 million tonnes of organic and biofertilizers) as against the current nutrient

consumption of 34 million tonnes (containing 27 million tonnes of chemical

1 Fertiliser Marketing News, July 2016



fertilizers and 7 million tonnes of organic and bio-fertilizers).2 India switched over

to Goods and Services Tax (GST) in 2017, bringing all economic activities,

including those related to agricultural sector under its ambit. Following are the

various types of GST.CGST –Central GST, SGST –State GST and IGST –

Integrated GST3 . Thus, GST is perhaps the biggest tax-related reform in India

since Independence bringing uniformity in the taxation structure and eliminating

the cascading of taxes that was levied in the past. The GST Council meets from

time to time to revise the GST rates for various products. Several states and

industries recommend reduction in GST tax rate for various items which are

discussed in these meetings.

Indian Fertilizers Industry and Key raw Material

India is the second largest consumer of fertilisers in the World with an

annual consumption of more than 55 million metric tons . Among the various types

of fertilisers used in India , urea is one of the highest consumed fertilisers in the

country as a source of nitrogen. The consumption of urea in the country in 2019

was 29 million tons. DAP is the second major consumed fertilizer in the country.

Looking forward the Indian Fertiliser market is by 2024 growing at a CAGR of

12.3 % during 2019-2024 .The Indian fertilisers market is expected to witness a

CAGR of 11.9% during the forecast period 2020-2025.The Indian fertiliser market

was worth INR 6.258 billion in the year 2019.4The fertilizer sector would cover not

merely the fertilizer industry but also certain activities in the agricultural sector,

which are very intimately linked with the production and distribution of

2 The Fertilizer Association of India, New Delhi ,29th November 2019. 3 Agricultural Economics Research Review 2018 4https://www.indianmirror.com/indian-industries/2020/fertilizer-2020.html

https://www.paisabazaar.com/tax/what-is-sgst-cgst-igst/



fertilizers.The fertilizer industry has to cater to the needs of the farmers who are

the most important consumers of the fertilizer industry.5

Indian Fertilizer industry is one of the vital industries for the Indian

economy, since it manufactures a very critical raw material for agriculture. The

fertilizer industry especially the ammonia urea plants are energy demanding in

their operation.The main objective of the fertilizer industry is to ensure the supply

of primary and secondary nutrients in the required quantities.6

Currently, the fertiliser production of the country is 42-45 million tonnes, and

imports are at around 18 million tonnes, according to the official data.The Union

Minister of Fertilizers and Chemicals has emphasized that India will be self-

reliant in fertiliser production by 2023 as new units are being set up with an

investment of Rs 40,000 crore to reduce dependency on imports. He has also stated

that all fertiliser companies are converting themselves to a gas-based

5https://www.paisabazaar.com/tax/gst-rates/ 6http://www.tradechakra.com/indian-economy/industries/fertilizers.html



technology.7Overall fertilizersproduction has increased by 2.7% duringFY20 after

registering muted growth in the last three fiscal years. Improvement in demand due

to a good southwest monsoon which resulted in higher sowing aided the increase in

production. Imports have increased sharply by 16.6% supported by the increase in

urea imports which constituents around 40% of the overall fertilizer imports. Sales

too have increased by 22% buoyed by a good monsoon and harvest season.8

Source: Annual growth rate of fertilizer production in India from financial year 2013 to 2019.9

Trend in prices of key input raw materials

India imports the raw materials needed for manufacturing fertilizers. Natural

gas is used as feedstock for the manufacturing of urea and accounts for 50%-80%

of the raw material cost. The fertilizer industry is the leading consumer of domestic

natural gas. Additional requirement of natural gas is supplied through imports in

the form of Regasified- Liquified Natural Gas(R-LNG). Out of 31 urea plants in

India, 28 are gas based and 3 are naphtha based. Natural gas is preferred as it is

intrinsically hydrogen rich and therefore contributes more hydrogen compared to

other feedstock on a unit weight basis.The heavier feedstock like coal and oil are

7https://www.financialexpress.com/economy/india-to-be-self-reliant-in-fertilisers-production-by-2023-sadananda-

gowda/2082267/ 8 Care Ratings :Research Paper 9https://www.statista.com/statistics/662326/fertilizer-production-growth-rate-india/



more complex to process and therefore the capital costs are higher compared to

natural gas.

As per the New Domestic Gas Policy, the government revises the domestic natural

gas price every six months i.e. April, September and October-March. During FY20

the price of domestic natural gas was USD 3.69/mmbtu during H1-FY20 and USD

3.23/mmbtu during H2-FY20. Currently (H1-FY21) the price for gas produced

from local fields has been revised to USD 2.39/mmBtu which is the lowest price

ever set as the New Domestic Gas Policy. As per our estimates, a 26% fall in

natural gas prices could potentially lead to a 12.5% decrease in cost of production

of urea, thus decreasing the working capital intensity of the fertilizer manufacturers

and it will also act as a relief for the fiscal spending of the government while

disbursing the urea subsidy, which is already constrained at the moment. This also

comes at a good time as the centre is planning to ease the controls on the retail

prices of urea and make the release of the ever-rising subsidy on it far more

targeted.Prices of R-LNG are usually governed by market dynamics based on

contracts and are linked with the global crude oil prices. However, soon fertilizer

plants could be taking delivery on India’s first gas exchange (prices are based on

market demand supply) ,the Indian Gas Exchange (IGX) which has just been



launched but currently it is only dealing with delivery of imported natural gas

(LNG) not of domestic natural gas price which is formula driven.

Prices of phosphoric acid, rock phosphates, ammonia and sulphur have fallen

sharply by 13.9%, 15.3%, 27.1% and 41.5% during FY20 respectively.

Manufacturers have passed on the benefit of soft raw material prices by lowering

the MRP of decontrolled fertilizers. The same downward trend has continued in the

new financial year as prices of phosphoric acid, rock phosphates, ammonia and

sulphur have fallen by 19.0%, 17.5%, 4.3% and 33.1% y-o-y during April 2020.10

India’s impact on the World Urea market

India is one of the largest players in the urea industry in terms of production,

consumption and trade. It is the second largest producer of urea in the world,

accounting for 14% of the global urea capacity. However, India’s domestic

consumption is much higher than the domestic production and it is a net importer

of urea. During the last few years, urea imports to India were reported to be high,

at 7 – 9 million t, that is, 18 – 28% of the world urea exports. With such a high

import requirement, India is a key market for the global fertilizer producers

10 Care Ratings Industry Research : Fertiliser Industry



currently. However, going forward ~6.4 million t of urea capacity is to be added

over the next 2 years, leading to a fall in import dependence. As per ICRA

estimates, urea imports will decline to around ~0.5 – 1 million t by the end of

FY2023, which will lead to an increase in the global surplus of urea.

India’s impact on the world phosphatic market

The global phosphate fertilizer industry is relatively well consolidated,

compared to urea, with the top 10 producers accounting for around 65% of the total

DAP and MAP capacity. Though India is the third largest producer of phosphatic

fertilizers, a large proportion of P&K fertilizer and/or their raw materials are

imported. During FY2020, India’s DAP imports stood at 5.3 million t, which forms

35 – 40% of the world trade in DAP. Hence, India enjoys a formidable position in

the global phosphatic market as well, wherein any movement in India’s DAP

demand impacts the international DAP prices. However, a relatively well

consolidated industry structure for phosphates reduces India’s bargaining power to

some extent.

India’s impact on world potash market

There are only a few large suppliers of potash fertilizers globally as potash

mineral reserves are available only in certain regions. As India does not have

potash reserves, it imports its potash requirement of 2.5 – 3.5 million ton. Its

potash consumption accounts for only approximately 5 – 7% of the global demand

for potash, which provides it with moderate bargaining power.

Goods and Services Tax ( GST) and Fertiliser Industry

GST is an important fiscal instrument to ensure efficient, equitable and

sustainable economic growth. GST rate tariff in India is designed in 6 categories



of goods and services. Four main GST rate slabs framed with Essential goods and

services, Standard goods and services and luxury goods and services with 5%,

12%, 18% and 28%, respectively.

Tax structure in India is a three tier federal structure.The central government, state governments, and

local municipal bodies make up this structure. Article 256 of the constitution states that “No tax shall

be levied or collected except by the authority of law”. Hence, each and every tax that is collected needs

to backed by an accompanying law.Interestingly, the tax system in India traces its origin to the

prehistoric texts such as Arthashastra and Manusmriti. As proposed by these manuscripts, the taxes

paid by farmers and artisans in that era would be in the form of agricultural produce, silver or gold.

Based on these texts, the foundation of the modern tax system in India was conceptualised by the Sir

James Wilson during the British rule in India in the year, 1860. However, post-independence the

newly-established Indian Government then soldered the system to propel the economic development of

the country. After this period, the Indian tax structure has been subject to a host of change.11

Commonly used Goods and Services at 5%, Standard Goods and Services fall

under 1st slab at 12%, Standard Goods and Services fall under 2nd Slab at 18%

and Special category of Goods and Services including luxury - 28%. The most

essential goods and services attract nil rate of GST under Exempted

Categories. Luxury goods and services and certain specific goods and services

attract additional cess than 28% GST. According to exports in Fertilizers Industry,

even if the lower end is applied to fertilizers, it would be double the existing 6%

(excise of 1% and VAT of 5%). A rate higher than even 12% is not ruled out

considering that majority of states want standard rate to be higher than 18%.

In the pre-GST regime, the concessional duty rate was prescribed for fertilizers

falling under Chapter 31 of the Tariff (notification No. 12/2012-Central Excise).

This concessional rate was applied to goods falling under Chapter 31 which are

clearly to be used directly as fertilizers or in the manufacture of other fertilizers,

whether directly or through the stage of an intermediate product. In the GST

11https://www.aegonlife.com/insurance-investment-knowledge/tax-structure-in-india-explained/



regime, tax structure on fertilizers has been prescribed on the lines of pre-GST tax

incidence. The wording of the GST notification is similar to the central excise

notification except certain changes to meet the requirements of GST. These

changes were necessitated as GST is applicable on the supply of goods while

central excise duty was applicable on manufacture of goods. Accordingly,

fertilizers falling under heading 3102, 3103, 3104 and 3105, other than those which

are clearly not to be used as fertilizers, attract 5% GST 12. However, the fertilizers

items falling under the above mentioned headings, which are clearly not to be used

as fertilizer attract 18% GST .13The intention has been to provide concessional rate

of GST to the fertilizers which are used directly as fertilizers or which are used in

the manufacturing of complex fertilizers which are further used as soil or crop

fertilizers. The phrase “other than clearly to be used as fertilizers” would not cover

such fertilizers that are used for making complex fertilizers for use as soil or crop

fertilizers.Thus, it is clarified that the fertilizers supplied for direct use as

fertilizers, or supplied for use in the manufacturing of other complex fertilizers for

agricultural use (soil or crop fertilizers), will attract 5% GST.14The Goods and

Services Tax has the potential to drastically reduce transaction costs owing to

elimination of cascading effect of tax-on-tax and withdrawal of a host of local

levies and substantially increase efficiency across the supply chain as interface

with multiple authorities over a number of geographical locations gets

eliminated.15

Inverted duty structure is a situation where import duty on finished goods is low compared to the

import duty on raw materials that are used in the production of such finished goods. When the import

12[S. No. 182A to 182D of the First schedule to the notification No.1/2017-Central Tax (Rate) dated 28.06.2017]. 13[S. No. 42 to 45 of the III schedule to the notification No. 1/2017 Central Tax (Rate)]. 14Circular No. 54/28/2018-GST,F. No. 354/255/2018-TRU (Part-2),Government of India,Ministry of Finance, Department of Revenue,dated 9th august 2020.

15https://www.financialexpress.com/opinion/gst-will-boomerang-on-fertilisers/347612/

https://www.financialexpress.com/opinion/gst-will-boomerang-on-fertilisers/347612/



duty on raw materials is high, it will be more difficult to produce the concerned good domestically at a

competitive price. Several industries depend on imported raw materials and components. High tax on

the raw materials compels them to raise price. On the other hand, foreign finished goods will be

coming at a reduced price because of low tax advantage. In conclusion, manufactured goods by the

domestic industry becomes uncompetitive against imported finished goods.16

Urea is the only fertilizer under statutory price control and its import for direct

agriculture use is permitted through State Trading Enterprises (STEs) namely

MMTC Limited (MMTC), State Trading Corporation Limited (STC) and Indian

Potash Limited (IPL), under the Foreign Trade Policy of the Government. M/s

Rashtriya Chemicals & Fertilizers (RCF) and National Fertilizers Limited (NFL)

also imported urea for a limited time period. Government is also importing

approximately 20 Lakh Metric Tonnes urea from Oman India Fertiliser Company

(OMIFCO) under a Long Term Urea Off Take Agreement (UOTA) between GOI

& OMIFCO. The import of urea from OMIFCO is made through M/s IFFCO &

M/s KRIBHCO. Import of fertilizers (other than Urea) is free, commonly known as

Open General Licence (OGL).Various companies import these fertilizers as per

their commercial judgment. Government does not maintain the value of these

imports.17

As we know that,Goods and Services Tax is a uniform simplified indirect

tax on Goods and Services across India. This would subsume large number of

existing indirect taxes & duties levied by the Centre and the State governments.

GST would be applicable on ‘supply’ of goods or services as against the present

practice of tax on manufacture of goods and /or on sale of goods and provision of

services. GST is destination based taxation on consumption as against present

system of origin based taxation. With provision of seamless credit against taxes

16https://www.indianeconomy.net/splclassroom/what-is-inverted-duty-structure/ 17Rajya Sabha unstarred question no 1658 dated 9/3/18.



paid on inputs, commonly known as Input Tax Credit (ITC), GST generally would

not be a cost to the business except in the case of exempt goods and services and

where claiming ITC is not allowed for some reason.

It is going to be a dual GST system with centre and state simultaneously

levying it on a common base of transaction value. GST to be levied by the centre

would be called Central GST or CGST and that levied by the state government

would be called State GST or the SGST. Similarly, GST levied by the Union

Territories would be called Union Territories GST or UTGST. Integrated GST or

IGST would be applicable on inter -state transactions which will be equivalent to

CGST plus SGST. Import of goods or services would be treated as inter-state

supplies and IGST would be levied. Exports would be zero-rated under GST

regime.Intra-state transactions within the same legal entity having single

registration would not be subjected to GST. But inter-state supply (like stock

transfers) would attract GST. The list of exempted goods and services would be

common for both states and the Centre. Before looking at likely impact of GST on

Indian fertiliser industry, it would be appropriate to underline the unique operating

environment of fertiliser industry. Indian fertiliser industry is largely dependent on

imports either in the form of raw materials, intermediates or finished fertilisers.

The dependence on imports in the case of nitrogen is 60% and in the case of

phosphates it is 93%. For potash, India is 100% dependant on imports.The

government is providing subsidy on fertilisers which is currently exempt from

Central and State taxes. Taxing subsidy would increase the cost of fertilisers which

would either increase retail price or subsidy. Subsidy represents about 73% of the

total cost of urea. In the case of DAP and MOP subsidy represents 31% and 40%,

respectively of the total cost. Fertiliser sector is allowed a number of tax

concession and exemptions under the existing tax regime. With such exemptions

and concessions the total incidence of central and state taxes on the value of



fertilisers excluding subsidy is currently estimated at 6-10%. This includes about

2-4% taxes on input stage and 4-6% tax at output stage. Large quantities of

fertilisers are currently moved on stock transfer basis without any incidence of

state taxes.The issues apprehended by fertiliser industry arising due to

implementation of GST inter-alia included taxing of subsidy, increasing the rate of

taxation on fertilisers and inputs, non-inclusion of natural gas and other petroleum

products like petrol & diesel, continuing cascading effects of basic customs duty

on imports in light of large import dependence, etc. Large amounts of accumulated

input tax credit was also apprehended due to higher incidence of tax on inputs

which are taxed at full value and lower tax on fertilisers which are taxed excluding

the subsidy.18

Tax on Fertilizers – After GST

After the launch of GST, the definition of fertilizers for taxation purpose has

been kept the same as before, however, certain changes have been made to ensure

that these items meet the GST requirements. This was needed because GST is a tax

on supply as opposed to central excise duty which was levied on the manufacturing

of goods. According to the GST notification No.1/2017-Central Tax (Rate) dated

28.06.2017, 5% GST is applicable to all the fertilizers that fall under heading 3102,

3103, 3104 and 3105, except for those which are not used as fertilizers. Fertilizers

that are deemed not be used as fertilizer (in agriculture) will attract GST at the rate

of 18%. In the post-GST regime, the final tax rate on fertilizers which are strictly

used in agriculture only as fertilizers has been reduced from the earlier 12% to 5%

under GST. All types of fertilizers used for agriculture purposes will be taxed at

the same GST rate of 5%.

18 Satish Chander Article on Fertiliser Industry



As per ICRA Fertilizer companies will benefit from GST cut on

phosphoric acid to 12% from 18%.The recent reduction of the GST on fertiliser-

grade phosphoric acid to 12% from 18% earlier is likely to be marginally positive

for fertilizer manufacturers as it will benefit them in terms of lower input tax

credits that will result in lower working-capital blockage.While fertilisers are taxed

at 5%, taxation of inputs at 18% had led to an inverted duty structure and blockage

of working capital due to large unused input tax credits. The reduction in the tax

rate on phosphoric acid will result in reduction of the input tax credits and

associated cash flow mismatch for the industry. No change in the tax rate on

ammonia and 12% tax rate on phosphoric acid will continue to result in large

unused input tax credits for the industry and associated liquidity issues.While

reduction in the tax rate on phosphoric acid is a welcome step, delay in

reimbursement of the input tax credits adds to the strain in the liquidity position of

the industry already impacted by delay in receipt of subsidies from the

government.19

Tax on direct-use Fertilizers

Fertilizers supplied to be used directly as Fertilizers (for agriculture growth) will

be taxed at 5% GST rate.

Tax on Fertilizers supplied for manufacturing other Fertilizers for

Agricultural use

Fertilizers (soil or crop fertilizers) which are supplied to be used for

manufacturing other advanced or more complex fertilizers for use in agriculture

will be taxed under the same GST slab of 5%. These refer to simple fertilizers like

MOP (Muriate Potash) which is further used for making complex fertilizers.

Tax on Fertilizers not to be used as Fertilizers

19https://economictimes.indiatimes.com/industry/indl-goods/svs/chem-/-fertilisers/fertilizer-companies-to-benefit-

from-gst-cut-on-phosphoric-acid-to-12-from-18-icra/articleshow/62603098.cms?from=mdr



In some cases, fertilizers are not exactly used for agriculture or similar

purposes. For instance, some fertilizers are used for industrial purposes and other

things. Under GST, all such kinds of fertilizers will be taxed at the rate of 18%.

Issues with the Tax in the Fertiliser Industry

There are number of issues which remain cause of concern. These inter-alia

include concessional rate of GST for fertilisers and inputs, timely refund of

unutilized input tax credit for fertilisers sector, problems due to non- inclusion of

natural gas and petroleum products under GST and the issue of basic customs

duty on materials increase the cost of domestic P & K fertilisers in light of large

import dependence.Basic customs duty on raw materials will continue as a cost

to the industry because basic customs duty is not covered under GST and hence

input tax credit against such taxes and duties will not be allowed. Similarly,

petroleum products like natural gas, petrol and diesel will be brought under

GST at later stage as and when GST Council decides so. Therefore, the existing

taxes and duties on these products would continue to be levied without credit for

such taxes under GST regime. This means cascading effect of taxes on these

products would continue to increase the cost to the industry. In case of urea,

natural gas constitutes major portion (75%) of the cost of production. Further,

levy of higher than the existing rate of taxation on fertilisers as well as on inputs

would also result in either increase in retail price to the farmers or increase in

subsidy out go or both. Refund of accumulation of input tax credit for fertiliser

sector is also a major issue. Fertiliser industry apprehends large amounts of

accumulated input tax credit. It islikely to arise due to inverted duty structure if

rate of GST on inputs are higher than the rate of GST on finished fertilisers. This

could add upto several thousand crore perannum. Any delay in this refund will

increase the working capital requirement and hence interestcost. Large amounts of

input tax credit will also arise due to lowertax incidence on fertilisers (as subsidy is



excluded from taxable value) than that on inputs (which would be taxed at full

value) evenif the rate of tax is same on input and output. There is no provision for

refund of this amount which can also run into thousands of crores. Provision of

refund on these two accounts should be same as has been provided for export. This

will ensure prompt refund and avoid the increase in cost of supply of this vital

agriculture which is highly subsidised by the Government of India. Government

can decide on the concessional rate (at lowest level applicable for goods of

common consumption) of GST for fertilizers and inputs.There is need for

clarification regarding GST and taxable value of urea imported on government

account and sold to fertiliser companies on high seas for further handling and

distribution. Transportation of fertilizers hitherto exempt from levy . Therefore,

there should not be any GST on fertiliser transportation to avoid the increase in

delivered cost of fertilisers.The pilot project for Direct Benefit Transfer (DBT) of

fertiliser subsidy is under implementation in several districts.

Government is pushing to expand this to the entire country in days to come.

Simultaneous implementation of GST and DBT may affect smooth conduct of

retail business and hence availability of fertilisers to the farmers. GST is a much

bigger reform applicable to all economic activities of the country and should get

precedence over DBT. Therefore, it would be highly appropriate to postpone DBT

in fertiliser sector by a year or so to facilitate smooth implementation and

stabilisation of GST regime20. The recent reduction of the GST on fertiliser-grade

phosphoric acid to 12% from 18% earlier is likely to be marginally positive for

fertilizer manufacturers as it will benefit them in terms of lower input tax credits

that will result in lower working-capital blockage, says ratings agency ICRA.21 The

18% tax rate earlier on phosphoric acid and ammonia vis-a-vis the 5% tax rate on

20 Article on fertiliser Subsidy by Satish Chander 21https://economictimes.indiatimes.com/industry/indl-goods/svs/chem-/-fertilisers/fertilizer-companies-to-benefit-


https://economictimes.indiatimes.com/industry/indl-goods/svs/chem-/-fertilisers/fertilizer-companies-to-benefit-from-gst-cut-on-phosphoric-acid-to-12-from-18-icra/articleshow/62603098.cms?from=mdr




fertilisers was leading to build-up of input tax credits for the industry especially

because subsidy is free from GST, thereby leading to increase in working capital

requirement.While fertilisers are taxed at 5%, taxation of inputs at 18% had led to

an inverted duty structure and blockage of working capital due to large unused

input tax credits. The reduction in the tax rate on phosphoric acid will result in

reduction of the input tax credits and associated cash flow mismatch for the

industry.As per ICRA reduction in the tax rate on phosphoric acid is a welcome

step, delay in reimbursement of the input tax credits adds to the strain in the

liquidity position of the industry already impacted by delay in receipt of subsidies

from the government.The GST Council has also reduced the GST rate on drip-

irrigation systems and mechanical sprayers from 18% to 12%. ICRA said the

change in the tax rate should encourage farmers to take up efficient irrigation

systems and mechanical sprayers for pesticide application. The GST Council has

also cut the tax rate on bio-pesticides from 18% to 12%, which, the rating agency

said, should aid its demand and use by the farming community.“The reduction in

the tax rates on drip-irrigation systems reiterates the focus of the union

Government to promote irrigation facilities for the farm sector and its overall plan

to double the farm income by FY 2022. The decline in tax rate on bio-pesticides is

in line with the government’s intent to promote the use of these products through

various government schemes and should encourage farmers to use these products

as an alternative to the chemical pesticides.”22

Subsidy on the fertiliser Industry

Given the critical role of fertilisers in ensuring food security, for decades,

the government has followed a policy of controlling their prices at low level

22https://economictimes.indiatimes.com/industry/indl-goods/svs/chem-/-fertilisers/fertilizer-companies-to-benefit-






unrelated to cost of supply and reimbursing the excess as a subsidy to the

manufacturers. At present, while maximum retail price of urea is under statutory

control, on decontrolled P&K fertilisers too, it gives subsidy to enable low

MRP.The policy with regard to taxing fertilisers and raw materials used in their

production at the central level is attuned to the pricing and subsidy policy

environment. It is governed by the dictum that there is no point in collecting a tax

only to be paid back as an additional subsidy under the pricing scheme.All

fertilisers attract excise of 1% (plus education cess); in case, a manufacturer wishes

to avail of CENVAT credit, he has to pay 5%. Fertiliser imports attract customs

duty of 5%. Natural gas and naphtha feedstock used in manufacture of urea—are

exempt from excise, while there is no customs duty on import of naphtha for

fertilisers. However, import of LNG attracts a duty of 5%. Import of rock

phosphate, sulphur, ammonia and phosphoric acid (raw materials for P&K

fertilisers) also attract customs duty of 5%.In short, even as central levies are either

low or nil, states charge high VAT especially on inputs. This leads to cascading

effect and higher cost of supplying fertilisers (which varies from unit-to-unit

mainly due to inter-state variation in tax on gas/naphtha) and in turn, higher

subsidy outgo as urea as MRP remains fixed.By subsuming all these taxes viz.,

excise, VAT, entry tax, purchase tax, octroi etc under a single uniform tax, GST

will offer a good opportunity to remove all these anomalies. But, the scenario on

ground zero raises many hackles.First, going by the recommendation of chief

economic advisor (standard rate 18%, with 12% at lower end and 40% on the

higher side), even if the lower end is applied to fertilisers, it would be double the

existing 6% (excise of 1% and VAT of 5%). A rate higher than even 12% is not

ruled out considering that majority of states want standard rate to be higher than

18%.Second, a bigger problem is due to the government’s intent to keep gas

outside the ambit of GST. This means that gas companies will not be able to claim

credit for taxes paid by them on raw materials and other inputs leading to higher

price. The states will also continue to levy VAT which in some states is as high as

15-20%. They may even continue with stuff like octroi, purchase tax etc.Third,



electricity generation and distribution is also excluded from ambit of GST. Under

the Constitution, Entry 53 in State List of the Seventh Schedule empowers states to

impose tax on sale and consumption of electricity, except when consumed by the

central government or Railways. At present, electricity is exempt from CENVAT

and VAT. Such exemption results in a situation whereby those engaged in this

business are not allowed any credit for taxes paid on their inputs used. Thus, the

excise or state VAT paid on equipment and stores gets embedded in cost of the end

product. This, together with the non-creditable electricity duty, will result in

substantial tax cascading when electricity is used as an intermediate input.

Fertiliser units-most of them having captive power plants-will bear the

brunt.Fourth, fertiliser manufacturers can claim credit for tax paid on inputs viz.,

gas/naphtha/power etc.This is easier said than done. GST of 12% levied on MRP

which is barely one-fourth to half of production cost (courtesy, heavy subsidy on

urea) would hardly generate an amount sufficient enough to cover tax paid. So,

they will be saddled with huge un-covered tax credit year-after-year. Such an

architecture staring at fertiliser industry short supply of gas, high cost, huge under-

recoveries and delayed payment of subsidy etc. It can deliver intended results only

if critical sectors like gas and electricity are brought within its ambit and uniform

GST at no more than 6% is applicable to fertilisers and these inputs.23The fertilizer

industry is highly regulated and monitored by the government. The difference

between the cost of production which is higher than the price at which the fertilizer

is sold to the beneficiary, is reimbursed by the Government in the form of

subsidies. Whenever there is shortage of funds, the Government liquidates the

pending subsidy by arranging loans under a Special Banking Agreement (SBA).

While the MRP of urea is fixed and controlled by the Central Government that is

not the case with decontrolled fertilizers where in the manufacturers have the

liberty to price the product freely and according to the prevailing market

conditions.

23https://www.financialexpress.com/opinion/gst-will-boomerang-on-fertilisers/347612/

https://www.financialexpress.com/opinion/gst-will-boomerang-on-fertilisers/347612/



Note 2019-20 figures have been sourced from CGA and are Provisional; A-Actuals; BE Budget

Estimates

The fertilizer subsidy to be disbursed during FY21 has been reduced by 12.1% to

Rs 71,309 crore which could be insufficient for the fertiliser industry which has

time and again faced issues regarding inadequate subsidy provisioning. This could

lead to a subsidy backlog, thereby impacting the liquidity position of the industry.

If prices of raw materials (particularly of natural gas) are to rise during the year,

this could prove to be problematic and challenging for the government. Within the

subsidy Rs 47,805 crores has been earmarked as the urea subsidy and the

remaining Rs 23,504 crores has been earmarked for the nutrient based subsidy.This

means cascading effect of taxes on these products would continue to increase the

cost to the industry. In case of urea, natural gas constitutes major portion (75%) of

the cost of production. Further, levy of higher than the existing rate of taxation on

fertilisers as well as on inputs would also result in either increase in retail price to

the farmers or increase in subsidy out go or both. Refund of accumulation of input

tax credit for fertiliser sector is also a major issue. Fertiliser industry apprehends

large amounts of accumulated input tax credit. It is likely to arise due to inverted

duty structure if rate of GST on inputs are higher than the rate of GST on finished

fertilisers. This could add upto several thousand crore per annum. Any delay in this

refund will increase the working capital requirement and hence interest cost. Large



amounts of input tax credit will also arise due to lower tax incidence on fertilisers

(as subsidy is excluded from taxable value) than that on inputs (which would be

taxed at full value) even if the rate of tax is same on input and output. There is no

provision for refund of this amount which can also run into thousands of crores.

Provision of refund on these two accounts should be same as has been provided for

export. This will ensure prompt refund and avoid the increase in cost of supply of

this vital agriculture input, which is highly subsidised by the Government of India.

Government can decide on the concessional rate (at lowest level applicable for

goods of common consumption) of GST for fertilisers and inputs. There is need for

clarification regarding levy of GST and taxable value of urea imported on

government account and sold to fertiliser companies on high seas for further

handling and distribution. Transportation of fertilisers hither to has been exempt

from levy of taxes. Therefore, there should not be any GST on fertiliser

transportation to avoid the increase in delivery cost of fertilisers. GST is a much

bigger reform applicable to all economic activities of the country and should get

precedence over DBT. It would be highly appropriate to postpone DBT in fertiliser

sector by a year or so to facilitate smooth implementation and stabilisation of GST

regime.24The fertilizer subsidies are borne by the Central Government. The need

for the fertilizer subsidy arises from the nature of fertilizer pricing policy of the

government. The fertilizer price policy is being governed with two objectives i.e

making fertilizer available to farmers at a low and affordable price to encourage

their use and increase production and ensuring fair returns on the investment made

by the fertilizer industry to attract more investment in the fertilizer industry.

To fulfil the first objective, the government has been keeping the selling prices of

fertilizers static and uniformly low throughout the country.As far as the second

objective is concerned, the government had come up with the policy of “Retention

24 Article by Satish Chander on Fertiliser Industry



Price Scheme” in the year 1977. Under RPS, the government fixes a fair ex-factory

retention price for various fertilizers of different manufacturers. The Government

pays the manufacturers their cost of production along with a profit margin of 12

percent (post tax) if the factory utilises the 90 percent of the installed capacity.

Under the fertilizer pricing policy, the farmer gets the fertilizer at a pre-determined

low rate called maximum selling price. The manufacturer was paid an amount

called Retention Price which is fixed at a high level so that manufacturer can cover

his cost and yet leave a 12 percent profit.25

Import Duty Analysis of the Tax Structure of the Raw materials and final

products of the fertiliser Industry

Overall fertilizers production has increased by 2.7% during FY20 after

registering muted growth in the last three fiscal years. Improvement in demand due

to a good southwest monsoon which resulted in higher sowing aided the increase in

production. Imports have increased sharply by 16.6% supported by the increase in

urea imports which constituents around 40% of the overall fertilizer imports. Sales

too have increased by 22% buoyed by a good monsoon and harvest season.

Production of urea increased by 1.3%. Overall sales of fertilizers have increased

sharply by 45.1% during the first two months of FY21. Sales of urea, DAP and

MOP have increased by 26.8%, 95.2% and 48.5%. Panic buying by farmers and

dealers coupled by the low prices of the commodity have led to increased sales of

fertilisers. Farmers are currently stocking up fertilizers for the on-going Kharif

season and are building up stocks in order to avoid any later logistical issues which

might be faced due to the coronavirus pandemic. A favourable monsoon forecast

ahead of the main kharif application season too has augmented the demand.

Imports of urea have increased sharply by 94.3% while and on the other hand 25https://www.civilsdaily.com/types-of-farm-subsidies-in-indian-agriculture-irrigation-and-power-subsidies-

fertilizer-subsidy-seed-subsidy-credit-subsidy/



imports for DAP and MOP fell sharply by 51.3% and by 31% respectively during

April 2020.26

All Sales figures are April-May; Production and Imports are of the month of April 2020

Production has increased marginally on account of efficiencies of scale achieved

by urea manufacturers even with the temporary shutdown of certain manufacturing

units during the year. Imports have risen by 22.5% to counter the shortfall in

domestic production. Import dependence of urea (imports as a proportion of

production plus imports) has increased to 27% (from it being 24% during FY19).

India mainly imports Urea from Oman, Iran and China. Offtake during the year has

been positive and has increased by 16.7%.27

Tariff Item Description of goods Unit Rate of duty

Standard Prefer- ential

Areas

26 Care Ratings Industry Research : Fertiliser Industry 27 Care ratings :Industry Research



(1) (2) (3) (4) (5)

3101 ANIMAL OR VEGETABLE FERTILISERS, WHETHER OR NOT

MIXED TOGETHER OR CHEMICALLY TREATED; FERTILISERS PRODUCED BY THE MIXING OR CHEMICAL TREATMENT OF

ANIMAL OR VEGETABLE PRODUCTS

3101 00 - Animal or vegetable fertilisers, whether or not

mixed together or chemically treated; fertilisers

produced by the mixing or chemical treatment of

--- animal or vegetable products :

- 3101 00 10 Guano kg. 10% --- Other : 3101 00 91 ---- Animal dung kg. 10% - 3101 00 92 ---- Animal excreta kg. 10% -

3101 00 99 ---- Other kg. 10% - ____________________________________________________________________________________________________ 3102

- MINERAL OR CHEMICAL FERTILISERS, NITROGENOUS

3102 10 00 Urea, whether or not in aqueous solution kg. 10% - - Ammonium sulphate; double salts and mixtures

-- of ammonium sulphate and ammonium nitrate:

3102 21 00 Ammonium sulphate kg. 5% -

3102 29 -- Other : 3102 29 10 --- Ammonium sulphonitrate kg. 10% -

3102 29 90 --- Other kg. 10% -

SECTION-VI 286 CHAPTER-31

(1) (2) (3) (4) (5)

3102 30 00 - Ammonium nitrate, whether or not in aqueous kg. 10% -

-

Solution

3102 40 00 Mixtures of ammonium nitrate with calcium kg. 10% - carbonate or other inorganic non-fertilising

- Substances

3102 50 00 Sodium nitrate kg. Free - 3102 60 00 - Double salts and mixtures of calcium nitrate kg. 10% -

-

and ammonium nitrate 3102 80 00 Mixtures of urea and ammonium nitrate in kg. 10% -

aqueous or ammoniacal solution

3102 90 - Other, including mixtures not specified in the

---

foregoing sub-headings :

3102 90 10 Double salts or mixtures of calcium nitrate kg. 10% -

---

and magnesium nitrate

3102 90 90 Other kg. 10% - 3103

- MINERAL OR CHEMICAL FERTILISERS, PHOSPHATIC

3103 10 00 Superphosphates kg. 10% -

3103 90 00 - Other kg. 10% - ____________________________________________________________________________________________________ 3104 - MINERAL OR CHEMICAL FERTILISERS, POTASSIC



3104 20 00 Potassium chloride kg. 10% - 3104 30 00 - Potassium sulphate kg. 5% -

3104 90 00 - Other kg. 10% - ____________________________________________________________________________________________________

3105 MINERAL OR CHEMICAL FERTILISERS CONTAINING

TWO OR THREE OF THE FERTILISING ELEMENTS

NITROGEN, PHOSPHORUS AND POTASSIUM; OTHER

FERTILISERS; GOODS OF THIS CHAPTER IN TABLETS

OR SIMILAR FORMS OR IN PACKAGES OF A GROSS

WEIGHT NOT EXCEEDING 10 KG

3105 10 00 - Goods of this Chapter in tablets or similar kg. 10% - forms or in packages of a gross weight not

exceeding 10 kg.

3105 20 00 - Mineral or chemical fertilisers containing kg. 5% - the three fertilising elements nitrogen,

phosphorus and potassium

3105 30 00 - Diammonium hydrogen ortho phosphate kg. 5% - (diammonium phosphate)

3105 40 00 - Ammonium dihydrogen ortho phosphate kg. 5% - (monoammonium phosphate) and mixtures

thereof with diammonium hydrogen

orthophosphate (diammonium phosphate)

SECTION-

VI 287

CHA

PTE

R-31

(1) (2) (3) (4) (5)

- Other mineral or chemical fertilisers containing the

-- two fertilising elements nitrogen and phosphorus :

3105 51 00 Containing nitrates and phosphates kg. 5% - 3105 59 00 -- Other kg. 5% - 3105 60 00 - Mineral or chemical fertilisers containing the kg. 5% -

two fertilising elements phosphorus and

Potassium

3105 90 - Other :

3105 90 10 --- Mineral or chemical fertilisers containing kg. 5% - two fertilising elements namely nitrogen

---

and potassium

3105 90 90 Other kg. 5% -

Future of Indian Fertiliser Industry

Overall, for the year FY2021, the growth in the volumes is expected to be 12 –

14%, driven by healthy progress of the monsoons and the elevated sowing levels



being witnessed in the kharif season, which has driven fertilizer sales to

unprecedented levels. The various measures taken by the GoI to aid the rural

economy through direct cash transfers has helped in improving the purchasing

power of the farmers. With a healthy kharif season, the rabi season should also

witness healthy fertilizer offtake as farmer’s incomes are expected to improve.

With the level of growth expected in FY2021, the reliance on imported urea is

expected to increase in the current year materially.The urea industry is expected to

benefit from the softening of spot R-LNG prices and crude oil prices as low energy

prices keep the cost of production lower. It also results in lower working capital

requirements and associated interest outgo, which is a drain on the profitability.

The profitability of the P&K players is also expected to remain stable following the

healthy capacity utilisation levels, driven by the healthy demand for both DAP and

NPK fertilizers in FY2020.With regard to the subsidy issue, the industry continues

to face liquidity issues due to the high outstanding subsidy, the timeline for which

needs to be improved, being a big drain on the players’ profitability. Although,

DBT has been implemented for the sector, the subsidy continues to be routed

through the industry instead of the farmers. With the subsidy recognition point

shifting from the point of despatch to the point of retail sale, the working capital

cycle for the industry has been elongated. Inadequate budgetary allocation of

fertilizer subsidy continues to remain a thorny issue for the industry, resulting in

large unpaid subsidy backlogs resulting in cash flow mismatches. The subsidy

backlog at the end of FY2020 is expected to have been approximately Rs. 470

billion and is expected to increase to approximately Rs. 570 billion by the end of

FY2021, given the inadequate subsidy budgeting, depreciation of currency and

expected volume growth during the year. As the COVID-19 crisis has squeezed the

finances of the GoI, there has been a proposal to reduce the subsidy budget

allocated to the fertilizer sector to 80% of its budgetary allocation in the Union



Budget for FY2021. In such a scenario, the subsidy backlog is likely to balloon to

~Rs. 800 billion, which may result in the industry facing a severe liquidity stress.

ICRA believes that the GoI needs to take concrete measures to improve the

financial health of the fertilizer industry, which continues to reel under pressure

from the subsidy delays and continued CAPEX, owing to the reduction in the

energy norms for the urea players, which keeps the profitability under pressure and

credit metrics subdued. An increase in the farm gate price of urea to a meaningful

level in relation to the import parity price, will also be a key imperative to address

nutrient distortions and subsidy concerns.28

Budgetary Allocation for the Fertiliser Industry

The underlying macros for the Indian fertilizer industry look promising despite the

coronavirus pandemic and macroeconomic uncertainty. With surplus reservoirs

levels, forecasts for a good kharif crop and plentiful rainfall this June-September

monsoon season, demand for the procurement of fertilizers seems promising. Sales

have increased sharply by 45.1% during the first two months of FY21 and going

forward with the recent proposals under the 'Aatmanirbhar Bharat' package

pertinent towards the agrarian economy which are focused on boosting the

agriculture and allied sector (by strengthening its infrastructure and logistics),

demand for fertilizers for the rest of FY21 seems sanguine for the industry.29

Budget and Expenditure of the Department of Fertiliser

28https://www.worldfertilizer.com/special-reports/25092020/indias-fertilizer-under-pressure/ 29https://www.worldfertilizer.com/special-reports/25092020/indias-fertilizer-under-pressure/



Integrated Pest Management and GST on Fertiliser Industry

In combination with Integrated Pest Management and Plasticulture techniques,

agrochemicals play a critical role by providing pre and post harvest protection to

crops and agricultural output. The proposed GST regime differentiates Crop

Protection from seeds, fertilisers, farm equipment, etc. Seeds (exempt), fertilisers

(12%), tractors (12%), crop protection products remain taxable at 18%, depriving

the industry of equal treatment vis-à-vis other agricultural inputs. As the farm

sector will remain largely exempt from GST, any input taxes suffered on inputs

used in the farm sector such as seeds, fertilisers, pesticides, tractors etc, will remain

blocked and contribute to increase in prices of farm output. Farm output prices are

controlled by market forces and the farmer has little control. As the input price



rises and output price remains stagnant, the farmer will have no option but to

absorb the cost, thus increasing his burden. Indian farmer is already reeling under

tremendous pressure from many ends and the increased burden of taxes will create

a crater in his income. If somehow, the output prices increase, the nation will suffer

as the food prices will go up, thus creating trouble for the common man. The way

out will be that GST rate for crop protection products is reduced from 18% to the

lowest slab possible. This will ensure parity across all agricultural inputs and

reduce encumbrance on farmers. 30

Way Forward

Consumption of urea is directly related to subsidy burden on the

government, which provides for over 70% on the cost of urea. The government has

estimated subsidy of Rs 48,000 crore on urea for 2020-21.The fertiliser industry is

seeking an overhaul of the urea subsidy regime to make existing factories

viable.The government aims to revive four sick plants next year and another by

2023 with an investment of Rs 38,000 crore as part of its Atmanirbhar Bharat

initiative. This will add 6.35 million tonnes to the country’s existing annual

capacity of 24 million tonnes and drastically reduce imports, which averaged about

6 mt a year.Urea plants are running at full capacity, but companies are struggling

to keep up due to “severe stress” on their finances and profitability. The stress

points include pending subsidy dues of more than Rs 40,000 crore as on 31 July

2020, rising production costs, and change in energy

efficiency norms.An appropriate combination of alternatives including additional

budgetary allocation, bank loans against subsidy receivable with interest being

borne by the government, and extension of credit by gas supplier, GAIL will

enable the industry to continue to produce and supply urea to the farmers at prices

30http://www.gstindiaexpert.com/Home/GSTNewsView/18-gst-on-pesticides-will-increase-farmers-burden-

2017061911358



lower than that of the imported urea.31 Doubling Farmers income by 2022, the

Union Finance Minister in her budget speech proposed to expand PM-KUSUM to

20 lakh farmers for setting up stand alone solar pumps and help another 15 lakh

farmers solarise their grid connected pump sets. She further proposed to

operationalize scheme to enable farmers to set up solar power generation capacity

on their fallow/barren lands and to sell it to grid. Resource efficiency is the first

step in doubling farmer’s income and balanced use of all kinds of fertilizers and

Zero Budget Natural Farming (ZBNF). She further proposed integration of

negotiable warehousing receipts (e-NWR) and National Agricultural Market (e-

NAM). She further emphasized that the integrated farming systems for rainfed

areas shall be expanded. Multi-tier cropping, bee keeping, solar pumps, solar

energy production in non cropping season will be added. The portal 51 on “Jaivik

kheti” – online national organic products market will also be strengthened.

31https://economictimes.indiatimes.com/industry/indl-goods/svs/chem-/-fertilisers/fertiliser-industry-seeks-overhaul-

of-urea-subsidy-regime-to-make-the-country-self-reliant/articleshow/77380391.cms

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