Carrot on farm taxes for states

To prevent high state taxes from distorting the market prices of farm commodities, the Commission for Agricultural Costs and Prices (CACP) is planning to suggest a method of indirectly incentivising states which bring down the mandi tax and such other levies to reasonable levels and are also big contributors of grain to the central pool.

The model was used in a limited way during the recent calculation for the minimum support price (MSP) of wheat for the 2012-2013 rabi marketing season that will start from April.

The Commission, headed by agricultural economist Ashok Gulati, had recommended two prices for the wheat MSP this time. The first one, of Rs 1,350 per quintal, assumed states would reduce this local tax component to four-five per cent. The second price recommendation came to around Rs 1,285 per qtl, which considered a situation where some states would continue to levy high local taxes. The Cabinet had accepted Rs 1,285 a qtl as MSP for wheat.

The first recommendation was made on the reasoning that states should not levy a tax of more than four-five per cent, or else it would distort prices and ward off prospective buyers.

Officials said Punjab, the biggest contributor of both wheat and rice to the central pool, levies these taxes in the range of 14-14.5 per cent. However, Madhya Pradesh, which contributed around six million tonnes (mt) of wheat to the central pool in 2011-2012, has a much lower tax rate.

High tax rates not only push up the price of grain, but distorts the market and checks prospective buyers from private companies. To correct this, the Commission now plans to suggest that any states which keep their local taxes on grain up to only five per cent and contribute heftily to the central pool should get 10 per cent more than the normally fixed MSP. Though many would argue that this could push up the retail price of commodities, CACP officials feel it will ultimately lead to correcting the price distortions that creep into the market due to unusually high taxes.

“Look at some of the big grain producing states. Private traders have virtually shunned those markets because of high taxes, which ultimately does not benefit growers,” a senior official said. He said this could be corrected if MSP calculations have a portion of the taxes included, provided states bring down mandi taxes to below five per cent.

Punjab and Haryana contribute the overwhelming share of wheat to the central pool. In 2011-2012, the central government procured 28 million tonnes of wheat, of which Punjab contributed around 11 mt and Haryana another seven mt. In rice, too, Punjab is one of the biggest contributors to the central pool.

Agriculture minister Sharad Pawar and finance minister Pranab Mukherjee have on numerous occasions urged states to bring down local taxes on grain and other farm commodities.