After the MET department predicted a normal monsoon this year, the fertilser stocks have been buzzing in trade. Moreover, the Pan India rollout of the Direct Benefit Transfer too will kick off at the start of June this year.
To discuss what is going right for the sector and the economy, CNBC-TV18 spoke to Anand Mohan Tiwari, MD of GSFC and Satish Chander, Director General of Fertiliser Association of India.
According to Chander, the DBT in short to medium-term will be a big challenge for the industry because under this the payment of subsidy is shifted to purchase by the farmers and they purchase only four months in a year. “Farmer buys the fertilizer only when his fields are ready and he can put them, he never buys and stocks them,” said Chander.
Fertiliser sector is fully controlled by the government -higher sales, cost of production is determined by GoI, said Chander.
Therefore the payment of the industry will shrink from 12 months to 4 months, once DBT is fully operational. This could have a direct bearing on Urea Policy where the cost of production and interest cost will go up, he said. All these issues have been brought to the notice of the government, said Chander.
Tiwari said DBT could create a level playing field. It is a step in right direction.
Chander said there is nothing which has changed for the industry for the stock prices to rally. GST and DBT are in fact challenges, which can adversely impact the companies in the short to medium term.
Below is the transcript of Satish Chander's interview.
Latha: What is going right for the fertiliser sector, is it largely on prospects of good monsoon and fertiliser offtake or is there some development on the direct benefit transfer and trying to provide subsidies to the farmers more efficiently?
Chander: As far as good monsoon is concerned it is good for the farmers and availability of fertiliser is assured, there is absolutely no issue.
To understand the other issue, one has to clearly know that the fertiliser sector is fully controlled by the government of India. If you look at the fertiliser sector and divide it into two parts urea and P&K fertilisers, urea MRP is fixed. So, everything is in control of the government. Higher sale etc or cost of production is all determined by the government of India.
Having said that let us keep the subsidy apart and look at GST which you mentioned as DBT. Now as far as the DBT is concerned in the short to medium term this is going to be a big challenge for the industry because today we have paid the subsidy for all the 12 months. Subsidy is paid once the fertiliser reach the dealer network - 90-95 percent of the subsidy is paid. Under DBT the payment of subsidy is being shifted to purchase by the farmers. Purchase by the farmers are only 4 months in a year. He buys the fertiliser only when his fields are ready and he can put the fertiliser, he doesn't buy and stock them.
So, the payment of the industry will shrink from 12 months to 4 months, once this is fully made operational. So, it has a direct bearing on the urea policy where the cost of production is fixed, interest costs will go up. These issues have been flagged with the government of India. So, this is going to be very challenging.
Sonia: The other point that you were making was, what the impact of GST could be on the fertiliser sector. What is the tax rate currently? Once the new rate comes in what would it be and what would the overall impact be you think?
Chander: There are couple of issues as far as GST is concerned. Fertiliser sector is a low tax sector. Our input taxes are only 1-2 percent, output taxes are 4-6 percent. On average we are totally taxed between 4-6 percent.
In GST there are two issues, one whether subsidy should be part of the tax or it should be kept out. That issue is more or less settled that GST will be applicable on the farmer's price. Second issue is what is the level of input taxes? If input taxes are not at the same level as the output taxes and GST for fertiliser we are reasonably sure though this is yet to be finalised, we will be taxed around 5 percent in the lowest slab.
If input taxes are say at 12 or 18 percent then we will pay more taxes during the production dispatch before the farmers buy. Actually we are supposed to pay 5 percent. So, this will lead us to a situation where we will have to recover lot of money from the government under GST.
So, the two challenges, one subsidy payments, second DBT shift to the farmers and third again we have to recover huge money from the government under the GST scheme. These are the issues which we have flagged with the government and we are in touch with them because under any scenario either inverted duty structure or subsidy not being part of it, both will lead to refund of input taxes which are going to be substantial. A rough estimate is about Rs 6000 crore per annum.
There is nothing which has substantially changed, our subsidy outstanding remains more than Rs 30000 crore. Last year our budget was Rs 70000 crore, we got a banking arrangement, so we can say Rs 80000 crore. This year that Rs 10000 crore will go. This year our budget effectively is Rs 60000 crore, outstanding is Rs 30000 crore. There is nothing which has changed. DBT and GST are challenges which can adversely impact the companies in the short to medium term.
For the full discussion, watch video
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
