Fertilizer Companies may get GST relief soon, Circular is on the way


In the event the GST Council appears to be advocating the release of a circular for the purpose of releasing refunds resulting from the inverted duty structure and subsidy, there may be some relief in store for the fertilizer companies.

It is expected that the council will convene following the general elections. A higher duty on input and a lower duty on output are the goals of the Inverted Duty Structure (IDS). The GST rate on fertilizer is 5%, but the GST rate on inputs such as ammonia (which is used to make P&K fertilizer) and packing material is 18%, resulting in an inverted duty structure. But the government delivers subsidies both on urea and P&K types of fertilizers, there are different procedures for calculation and that is the reason for the accumulation of input tax credit and resultant refund.

The farmers get urea at the legally required Maximum Retail Price (MRP) of ₹242 per 45 kg bag (exclusive of taxes and neem coating taxes). The government, through the Nutrient Based Subsidy Policy, provides a subsidy to the urea manufacturer/importer for the difference between the delivered cost of urea at the farm gate and net market realisation by the urea units.

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A set amount of funding is provided for phosphoric and potassium (P&K) fertilizers based on their nutrient content. This amount is determined annually or semi-annually. In accordance with this policy, fertilizer companies set MRP in accordance with market dynamics at a reasonable level that is overseen by the government.

The GST rate on fertilizer products is 5 per cent. However, the GST rate on inputs like ammonia and phosphoric acid is higher at 18 per cent. This consequence is the accumulation of large amounts of unutilized input tax credits which have costs attached to them.

The government’s subsidy is specifically excluded from the value of supply under the GST regime, according to the Fertiliser Association of India (FAI), with the output GST based only on the market realisation (or subsidised value) of the fertilisers. Additionally, the output GST (in absolute value) that must be paid in the case of P&K fertilizer is significantly less than the input GST credit because of the lower output GST rate rather than the GST rate on some inputs (including packing material), primarily as a result of the subsidy.

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Due to two factors—the value of inward supplies as a result of the fertilizer sales subsidy being greater than the value of outward supplies—ITC accumulated in the hands of fertilizer companies. Furthermore, a higher GST rate is applied to the material used to repackage the bulk fertilizers into smaller commercial quantities. However, businesses do not receive the refunds, and the issue has now come to court.

As per the tax expert, the current norms for the inverted duty refunds and the industry thinks that for such refunds the fertilizers are entitled deeming a higher tax rate on the package materials. The GST Council has, however, refuted these assertions in a few instances, particularly those involving government subsidies. The same lacks the consistency that led to statutory disputes before numerous high courts and increased working capital requirements for fertilizer companies.

In order to guarantee that the fertilizer industry adopts a consistent strategy for inverted duty refunds, it is necessary to provide clarification on the above in cases where ITC collection is impeded by supplier or customer error. It also guarantees the smooth flow of working capital, which benefits both consumers and businesses.

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