Not So Sweet: GST Council May Consider Sugar Cess In Next Meeting

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The Goods and Services Tax (GST) Council, headed by finance minister Arun Jaitley, will likely take up as early as in its next meeting, a proposal for the imposition of a cess on sugar to create a fund that will help mills clear cane dues owed to farmers, a senior government official told FE. The fund is proposed to finance the gap between the cane price mills can pay to farmers in accordance with a revenue-sharing formula recommended by the Rangarajan Committee and the benchmark rate — fair and remunerative price (FRP) — fixed by the central government.

Amid mounting cane arrears in states like Uttar Pradesh and Maharashtra ahead of the crucial general elections in 2019, a panel of ministers — comprising shipping and road transport minister Nitin Gadkari, food minister Ram Vilas Paswan and petroleum minister Dharmendra Pradhan — has also zeroed in on proposals such as a production-linked subsidy on cane and a reduction in the GST rate on ethanol (a cane by-product) from the current 18%. After the panel’s meeting on Monday, Paswan said the proposals would be placed before the Cabinet as well.

FE was the first to report on March 6 that the Centre was exploring the feasibility of a cess on sugar sales.

The date of the next GST council meeting hasn’t yet been announced but sources said it could be held in late May, after the Karnataka polls. Mills are struggling to clear cane arrears, which jumped to `19,780 crore at the end of March, following a crash in sugar prices in recent months. A faulty and arbitrary pricing mechanism adopted by some states — mainly Uttar Pradesh — has kept cane prices at exorbitantly high levels. The FRPs, which used to be at reasonable levels earlier, have been raised regularly in recent years, making it unviable for mills to pay farmers when sugar prices crash.

Sources had earlier said a cess of `1-1.50 per kg of sugar would be adequate to ensure farmers get their dues on time and mills are in much better shape as well. The food ministry had also written to the ministries of law and finance for advice if indeed such a cess could be levied on the GST. In fact, in a letter to food secretary Ravi Kant on April 13, Indian Sugar Mills Association (Isma) president Gaurav Goel has highlighted that mills are losing as much as `63 on purchases of each quintal of cane at FRP, based on the Rangarajan panel’s linkage formula.

The move to impose the cess is critical, as once the Centre accepts the payment ability of mills at a certain level and starts funding the gap with the FRP through the cess, it will be very difficult for states to mandate mills to pay a price even higher than the FRP.
The Rangarajan panel had in 2012 suggested that farmers be paid 75% of mills’ realisations from sugar for cane supplies, or 70% of sales proceeds from sugar and other cane byproducts like bagasse, molasses and pressmud.

Given that ex-factory sugar prices have crashed around 23% this marketing year that began in October 2017 to `2,800 per quintal now, the price payable to cane farmers in accordance with the Rangarajan panel’s linkage formula works out to around `226.80 per quintal, Goel argued.

However, dues based on the FRP effectively drives up the cane rate to `290 per quintal for 2017-18, factoring in an average all-India recovery of 10.8%. Since mills have crushed an estimated 263 million tonne of cane until end-March, the “unpayable” cane arrears, based on the Rangarajan formula, work out to `16,622 crore, the letter suggests, requesting the government to take steps to help mills bear the burden. Since cane dues in UP, the largest defaulter, are calculated on the basis of state advised prices (that are higher than FRPs), the total, pan-India arrears have touched `19,780 crore as of end-March.

While an ideal GST regime militates against the concept of a cess, the latest move reflects the Centre’s growing unease over regular piling up of cane arrears, mainly due to the reluctance of states like Uttar Pradesh to fix their distorted cane-pricing mechanisms that have hit farmers and mills alike for years now.

SOURCEFinancial Express


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