PMO Asks Food Ministry To See If Sugar Cess Feasible

Financial Express – 6 March 2018: The Prime Minister’s Office is learnt to have asked the food ministry to explore the feasibility of imposing a cess on sugar to create a fund that will finance any gap between the cane price mills can pay to farmers in accordance with the Rangarajan panel formula and the benchmark rate fixed by the Centre.

If such a new levy is imposed, it would mark a departure from a recent policy consensus against cesses that are incompatible with a modern system of indirect taxes, free from tax cascades. The move, however, reflects the Centre’s growing unease over the reluctance of states like Uttar Pradesh to fix their arbitrary cane-pricing mechanisms, which have hit farmers and industry alike. The move is also politically important as any cane arrears before the 2019 general elections will be a key issue for farmers in large states like Uttar Pradesh and Maharashtra.

The food ministry has written to the ministries of law and finance for advice if such a cess can be levied as the goods and services tax (GST) militates against such imposts, a senior finance ministry official told FE. The food ministry is expected to take a final view on the matter only after it gets the response of the two ministries.

Introduction of GST saw removal of a clutch of cesses earlier applicable on indirect taxes, including those for clean energy, Krishi Kalyan and Swachh Bharat but led to a new cess meant to compensate states for GST revenue deficits. The cesses that are currently applicable includes the ones on direct taxes like health and education cesses. Before GST, proceeds of sundry cesses accounted for 14% of the Centre’s gross tax revenue.

In the eight years since it was introduced in 2009-10, the fair and remunerative price (FRP) fixed by the Centre was higher than the cane rate based on the Rangarajan panel’s revenue-sharing formula in three years — 2013-14, 2014-15 and 2015-16 — for the country as a whole, thanks to a steady rise in the FRP even when sugar prices dropped below even cane costs. Sources said a cess of Rs 1.20 per kg of sugar in all these years would have been adequate to offset such a gap of more than Rs 22,000 crore (in these three years) and ensure farmers got their dues on time while mills remained in much better shape.

The move is critical, as once the Centre endorses the payment ability of mills at a certain level and starts funding the gap with the FRP from the cess, it will be very difficult for states to justify forcing mills to pay a price even higher than the FRP. States like Uttar Pradesh have been imposing state advised prices (SAP) for cane that have been much higher than the FRPs, bleeding mills’ balance sheets.

The Centre’s latest move follows a letter by the Union food ministry to the Uttar Pradesh government in 2017 asking it to adopt the Rangarajan panel formula. The 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 press mud. However, as in the past, the Union food ministry’s latest missive on cane pricing reforms hasn’t yet elicited any response from Uttar Pradesh, despite the fact that both the state and the Centre are now governed by the BJP-led coalition.

A substantial hike in the FRP in recent years and expected subdued rates of domestic sugar in view of a bumper production this year and a likely record harvest in 2018-19 next have pressured mills’ ability to pay such elevated rates. As such, the CACP has proposed an almost 8% increase in the FRP for 2018-19 to Rs 275 per quintal, against Rs 255 now. While the FRP has already been hiked by more than 83% between 2010-11 and 2017-18, the ex-factory price of sugar has gone up only 25% during this period.

Cane dues owed to farmers jumped to Rs 14,000 crore as of January 31, against Rs 9,500 crore a year earlier. However, a substantial portion of these dues belong to mills in Uttar Pradesh, where the SAP of Rs 315 per quintal for 2017-18 is much higher than the FRP of Rs 255.



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