Co-existence of subsidy and taxes

It is aid that subsidies are converse of taxes. But Tax men believe that taxes and subsidies can co-exist on the same product, in the same sector and that too in one of the most subsidized as well as priority sector.  

The policy statement of GOI on Fertilizer reads as under:

“For sustained agricultural growth and to promote balanced nutrient application, it is imperative that fertilizers are made available to farmers at affordable prices. With this objective, urea being the only controlled fertilizer, is sold at statutory notified uniform sale price, and decontrolled Phosphatic and Potassic fertilizes are sold at indicative maximum retail prices (MRPs). The statutorily notified sale price and indicative MRP is generally less than the cost of production of the irrespective manufacturing unit. The difference between the cost of production and the selling price/MRP is paid as subsidy/concession to manufacturers. As the consumer prices of both indigenous and imported fertilizers are fixed uniformly, financial support is also given on imported urea and decontrolled Phosphatic and Potassic fertilizers.”

Interestingly, Fertilizer, one of the highest subsidized sectors is also subject to a variety of central and state taxes. Impost/levies thus increase the cost of fertilizers. Such cost increases have to be either recovered by increase in MRP which shift the burden on the farmers or it has to be compensated by the Central Government in the form of subsidy. Though most central or state taxes, to the extent no set off is eligible, are reimbursed by Central government through Subsidy. However, this is except few additional VAT levied by some states. The matter receives its highest dramatic stage when tax is demanded on subsidy itself. In any case, the co-existence of subsidy and taxes on the same product is a classical case of Government giving money (subsidy) with one hand and taking money (as taxes) with another hand.

The issue of taxation of subsidy is bound to become more serious in coming years for fertilizer industries especially in the case of urea.  Urea price is statutorily controlled by the Government.  Being a political commodity, urea is over-subsidized. Thus, the share of subsidy in delivered cost of urea is around 69 percent in 2012-13. The share of maximum retail price (MRP), on the hand, would decline to 19 percent .The share of subsidy in delivered cost of imported urea would be even higher.

The tax men are busy in messing the policy by demanding Excise duty, Service Tax, VAT or Sales Tax on such subsidies depending upon possibility of fitting such subsidies in tax net without appreciating that subsidy is provided by the Central Government in public interest and the entire benefit of such subsidy will have to be passed on to the consumers.

A lot is being talked about reforms like rationalizing subsidy and introduction of GST. But till the time such much talked reforms come into play, the Fertilizer industries hopes that a suitable clarification, categorically defining the tax treatment of each subsidy.