Understanding the zero-sum game of the new agriculture infra cess

While the FM has ostensibly got her act right on imposing the levy without punishing the consumer, questions about the share of states, the rate structure and the use of funds remain

At the fag end of her 2021-22 Union Budget speech, Finance Minister Nirmala Sitharaman announced that the Central government will levy an Agriculture Infrastructure Development Cess (AIDC) on the import of some items, while taking care to ensure that consumers aren’t burdened by it.

“There is an immediate need to improve agricultural infrastructure so that we produce more, while also conserving and processing agricultural output efficiently. This will ensure enhanced remuneration for our farmers. To earmark resources for this purpose, I propose an Agriculture Infrastructure and Development Cess (AIDC) on a small number of items. However, while applying this cess, we have taken care not to put additional burden on consumers on most items,” Sitharaman said.

How has she managed to do that?

For starters, the budget documents show that while the Basic Customs Duty (BCD) on several items has been lowered, the difference has been made good by a cess charged at rates varying from 2.5 per cent in the case of gold and silver to 50 per cent in case of Bengal gram.

The end impact on several of these items, including petrol and diesel, is expected to be neutral as the effective duty rate has remained more or less the same or gone up by a nominal amount.

For example, in case of crude palm oil (the largest edible oil imported annually in the country by volume), industry sources said that before AIDC cess was levied, the BCD on crude palm oil was about 27.15 per cent on which a 10 per cent social welfare cess was levied.

Thus effective duty rate thus came to around 30.25 per cent.

However, after the Budget announcement, the BCD has been slashed from 27.15 per cent to 15 per cent.

A separate 17.50 per cent AIDC has been levied on crude palm oil, which along with the existing 10 per cent social welfare cess, will now take the effective import duty on crude palm oil to 35.75 per cent.

This is effectively 5 percentage points more than the current import duty on crude palm oil.

Now let's take the case of soybean oil. The pre-budget BCD was 35 per cent on which 10 per cent social welfare cess was levied.

Therefore, the effective import duty on crude soybean oil before the Budget was 38.50 per cent.

However, after the February 1 Budget, while the basic customs duty on crude soybean oil was reduced to 15 per cent from the current 35 per cent, an additional 20 per cent AIDC was levied, which along with the 10 per cent social welfare cess, takes the total effective import duty 38.50 per cent.

So there has been no change in the rate here. What's more, the story has been repeated in the case of pulses.

Bengal gram attracted a BCD of 60 per cent prior to the Budget. But on February 1, this was lowered to 10 per cent, and a 50 per cent AIDC was levied on the pulse, keeping the effective customs duty at 60 per cent, or the same as before.

“The Budget has reduced the basic customs duty on all pulses from various levels to a sweeping 10 per cent. However, this reduction has been offset by levying the agriculture infrastructure fund cess. So, basically, the net impact is zero,” Vimal Kothari, vice president of Indian Pulses and Grains Association (IPGA) said in a statement.

In the case of petrol and diesel, according to the Budget documents, an AIDC of Rs 2.5 per litre was imposed on petrol and Rs 4 per litre on diesel.

However, this cess, will not put additional burden on consumers as consequent to imposition of AIDC, the basic Excise duty and Special Additional Excise Duty rates have been reduced on them. 

As a result, unbranded petrol and diesel will suffer basic excise duty of Rs 1.4 and Rs 1.8 per litre, respectively.

Likewise, in the case of imported liquor, which was taxed at a steep 150 per cent BCD before the Budget, rates have been brought down to 50 per cent. However, an additional 100 per cent cess has now been imposed, bringing it more or less at the same level.

The areas of concern

Beyond the apparent negligible, and in some case, zero impact on the actual prices that consumers pay for these products due to imposition of AIDC, there are several other issues associated with the cess which raise several questions.

States' share clipped: The biggest issue is that the mechanism effectively prunes the share of states in tax revenues because cess DOes NOT form part of the central pool of taxes and isn't shared with states as per the Finance Commission’s recommendations.

Earlier, what was being collected in the form of customs duty on these items would have come into the central pool and would therefore have been shared between the Centre and states. But henceforth, with AIDC being vested entirely with the Union, and only the reduced BCD entering the poll, that share will go down.

Madan Sabnavis, chief economist at CARE Ratings explained this point Business Standard with an example. Let's assume that before the budget a product attracted 100 per cent duty, of which BCD was 95 per cent and cess was 5 per cent.

So, while 5 per cent went to the Central government coffers, the remaining 95 per cent was shared between the Union Government and the states.

Now, if that 95 per cent BCD is brought down to 93 per cent, while the cess component increases to 7 per cent, the additional 2 per cent gets transferred into the Central government accounts, and states don’t get anything from this component.

In case of crude palm oil, while earlier, earnings from the BCD of 27.5 per cent were shared between Centre and states, under the new regime, only 15 per cent will be shared between the two, while out of 37.75 per cent, some 27.5 per cent will vest entirely with the Central government.

No uniformity in rate: The second point with the AIDC is its differential rate structure. So far, cess have usually beem levied at a uniform rate but this is perhaps the first time that differential cess rates ranging from 2.5 percent to 50 per cent have been levied on different products.

“Usually, a cess has uniform rate, but in AIDC there are different rates for different products,” Saloni Roy, Senior Director of Deloitte India told Business Standard.

Quantum and end-use: Thirdly, the total collection from the AIDC is not very clear, though there are reports that show it could be in the range of annually Rs 30,000 crore.

Also, there are several questions about where AIDC collections will be used, because experts said that in the past too, there have been questions on whether cess money has been used for the purpose for which it has been collected.

“Where the cess money will be used is not very clear and in the past too, there have been debates on whether it is being used for the purpose for which it was levied. However, going by the name, it seems AIDC will be used for developing agriculture infrastructure, but what exactly does it mean for water distribution or crop diversification or for developing agriculture markets is not clear yet,” Roy added.

In case of the cess collected from edible oil imports, a prominent industry body has recommended that it should be used to incentivise cereal and grain farmers to shift to more valuable products such as oilseeds and pulses, in which India has long been facing shortages and has had to rely heavily on imports to meet domestic demand.

How this fund is used is a vitally important issue that needs to be addressed, going ahead.