Mid-June tea auction to take 4% procurement cost hit due to GST rollout

Input credit impasse adds to brokers' woes; mid-June is key auction as year's best tea is sold then

The Goods and Services Tax's (GST) rollout is likely to hurt tea industry's mid-June auction as the effective procurement cost for brokers, who sell tea in auction centres, is going to escalate nearly four per cent.

Another issue that brokers will have to deal with is the uncertainty over input credit.

The tax rate under the current system varies from state to state. While the Assam government charges a 0.5 per cent value added tax (VAT) and 0.25 central sales tax in the auctions, the West Bengal government charges a per cent flat rate VAT for sales from auction centres.

However, for private sales, the effective tax rate is four and five per cent effectively. This accounts for 60 per cent of Assam's 600 million kg (mkg) annual sales and West Bengal's 70 per cent yearly sales.

At present, auctioneers enjoy concessional rates at each stage of buying but after green leaf procurement, the buyers are eligible for input credit, although rates like Octroi or local taxes are not refunded. 

Thus, according to industry estimates, net tax levied on tea that is between 8-9.5 per cent is likely to go down to five per cent.

Nevertheless, for auctioneers and brokers, the rollout translates into an effective increase of a near four per cent across different auction houses.

Although in Assam, net effective tax rate for inter-state sales will go down from current nine per cent to five per cent. Tea producers are concerned on how they will claim the input tax refund.

Arun Thekedath, chairman of the Assam Tea Planters Association said lenders are concerned if they buy tea from auctions in pre-GST regime at the prevalent tax rate, how will they claim refund in post-GST regime.

Usually, the blenders lift huge stocks from the Kolkata and Guwahati auctions in mid-June when the second flush, considered as the industry's benchmark, arrives. 

While the procurement is done in bulk quantities and buyers pay the tax upfront, they later claim refund as they gradually de-stock during rest of the year.

As a result of lack of clarity on how this would impact sales, producers as well as auctioneers are doubtful about the forthcoming auction.

Blenders and packateers buy from auctions because of low tax rate. In case it leaps from current 0.75 per cent to five per cent, why would they be interested in the auctions, Dinesh Bihani, secretary of the Guwahati Tea Auction Committee, said.

Moreover, under the current pan-India auction rule, the invoice is raised by the seller, who is usually a broker. However, under the GST regime, the same invoice needs to be raised by garden owners or producers directly.

Among all auctions in the trade, the mid-June auction is the most important as the best produce of the year is sold in the June-July timeframe.

A similar situation prevails in West Bengal and Tamil Nadu, where the state government provides a four per cent VAT concession on tea auctions and buyers are able to obtain full refund of the input credit. 

The tea brokers then procure black tea from factories after paying a five per cent VAT and sell it in the auctions where buyers pay one per cent VAT. 

However, in West Bengal and Tamil Nadu, the similar five per cent rate is going to make the pre-GST and post-GST input credit claim smoother as compared to Assam.

Whenever there is a change in taxation, there is a disruption in the trade and the same is expected to settle down to normalcy in three-four months, Kalyan Sundaram, secretary of the Calcutta Tea Traders Association said, adding that gardens will get more input credit under GST regime.

In Kerala, the GST rollout is expected to have a neutral impact.

"Right now there will be no change when GST comes in, since tea is taxed at five per cent and we, at Kerala, are already paying five per cent," J K Thomas, chairman of the Tea Trade Association said.

Although producers in Assam and West Bengal are keeping their fingers crossed on how blenders and packateers will react to the mid-June (pre-GST regime) sale, south India seem confident about the auction.

"For time being, there will not be any change in wholesale or retail prices, because with taxes being paid by the blenders, they will be able to set it off as an input credit," Thomas said.