High state taxes make cheap wheat sale by Centre difficult

Last week, the Union Cabinet decided to release 6.5 mn tonnes (mt) of wheat in the open market for bulk consumers

High taxes, levied by major foodgrain growing states of Punjab and Haryana, have made the Centre's task of selling wheat at low rates in the open market difficult. The taxes, ranging from 4.7 per cent in Madhya Pradesh to 11.5 per cent in Haryana and still higher at almost 14.5 per cent in Punjab, are incurred by the Centre while procuring grains from farmers every year at a fixed minimum support price (MSP).

It is difficult for the Centre not to pass on these taxes to consumers at the time of selling grains in the open market as then its food subsidy burden will further inflate. According to some estimates, around 10 per cent or Rs 7,000 crore of the total food subsidy in 2011-12 was due to state taxes and levies, which the Food Corporation of India (FCI) paid by way of levies and taxes to different states.

Last week, the Union Cabinet decided to release 6.5 million tonnes (mt) of wheat in the open market for bulk consumers and another 500,000 tonnes for retail traders. This is over and above the 3 mt it already released for sale in the open market out of its stock estimated to be around 40.57 mt as on November 1 against the requirement of 14 mt.

In total, as on November 1, FCI has 69.5 mt of foodgrains stocks in the central pool (wheat and rice) against the requirement of 21.2 mt.

Traders said wheat will be sold to bulk consumers in non-producing states at a price which is inclusive of the MSP plus freight from Punjab and local taxes. For example, the price of wheat purchased from Punjab and sold in Delhi by the government would be Rs 1,285 per quintal (MSP) +freight (Rs 43 per quintal) + local taxes levied in Punjab 14.5 per cent).

This would effectively mean that any bulk purchaser of wheat from the government would have to shell out around Rs 1,514-Rs 1,550 for every quintal of Punjab wheat purchased in Delhi. Similarly, the price would vary from state to state, depending upon the tax and levies structure from where the wheat has been procured.

However, if the same wheat is purchased in Punjab, only the tax has to be paid and there would not be any freight charge.

Traders said as bulk of excess wheat stocks with the government are in Punjab and Haryana, the possibility of the purchases being made from those two states is the maximum.

Punjab and Haryana levy taxes at the rate of 14.5 per cent and 11.5 per cent, respectively, for every quintal of wheat purchased from these two states, which contribute almost 80 per cent of the total wheat produced in the country.

"This would straight away make wheat sold by the government almost Rs 200 per quintal more than the price at which it was selling wheat earlier," a trader from a leading multi-national grain trading firm said.

Last time when the central government decided to liquidate around 3 mt of wheat from the central pool and cool off domestic prices, it did not pass on the state taxes to the consumers.

In the case of Madhya Pradesh, though the domestic tax structure is slightly benign at 4.7 per cent, the state has already hiked MSP by Rs 100 per quintal because of the bonus announced by it in the 2012-2013 wheat procurement season.

The Commission for Agriculture Costs and Prices in its latest report on rabi crops for the 2013-14 marketing season has strongly advocated that states should be asked to lower the taxes levied on food grains. It even suggested the government review its open ended foodgrain procurement policy in states which levy heavy taxes or arbitrarily declare bonus over and above the centre fixed MSP as it distorts the market and perennially keeps FCI’s finances stretched