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With the new tax rate being lower than the 6 per cent levy prevailing in a majority of the states, fertiliser retail prices are likely to be marginally lower and benefit farmers, according to ICRA.
However, a few states like Haryana, Punjab and Andhra Pradesh, where fertiliser sales were exempt from value-added tax (VAT) and attract only 1 per cent excise duty, will face increased tax incidence of 5 per cent and prices will see upward movement, the rating firm said in a report on Tuesday.
"The government has paid heed to the industry and farmer demand to reduce the GST on fertilisers from 12 per cent to 5 per cent, which is positive for the farming community. The earlier 12 per cent tax rate would have led to an increase in fertiliser prices by 6-10 per cent and could have impacted the demand," ICRA Senior Vice-President and Group Head, Corporate Ratings, K Ravichandran, said.
However, he said, the new rate of 5 per cent will result in a marginal reduction in retail prices of fertilisers in a majority of the states, while Haryana, Punjab and AP, where fertiliser sales were exempt from VAT, will see a 4 per cent increase in rates.
"We expect the price of urea to reduce by Rs 3 per 50 kg bag. The decision, however, is credit neutral for the industry as the working capital requirement would remain unchanged as before," he added.
For DAP and NPK manufacturers there is no relief as the tax on the key raw materials, that is phosphoric acid and ammonia, has been retained at 18 per cent, giving rise to an inverted duty structure, where the final output (DAP or NPK) fertilisers are taxed at 5 per cent, while raw material is taxed at 18 per cent, he said.
As a result, Ravichandran said, the competitiveness of domestic manufacturers against importers will erode.
"A timely refund of excess input tax credit by the government will be the key to the liquidity position of both domestic manufacturers and importers of P&K fertilisers," he added.
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