In 2017, the Indian government put in place a goods and services tax (GST), which is an indirect tax regimen intended to harmonize various indirect taxes under one umbrella tax system. The primary objectives of GST are to streamline taxation, abolish the cascading tax, and encourage exports while enhancing the ease of conducting business.
An electronic national agricultural market (eNAM) was launched in 2016 that brought together the existing APMCs into one single national demand for agricultural commodities. The purpose of eNAM is to improve price discovery, bring transparency, and curb the menace of wastage in agri-trade.
It is estimated that the implementation of GST will be very decisive in the Indian agricultural sector, which contributes about 16% of GDP and employs a lot of workers, approximately more than 50%. In relation to agricultural inputs, outputs, supply chain, and growth, this paper evaluates the impact of GST on agricultural productivity.
GST and Agricultural Inputs
Bio-fertilizers, organic manure, compost, and chemical fertilizers registered a GST rate reduction from 5-7% earlier to 0-5% now. This has made fertilizers more affordable for farmers, encouraging balanced nutrient application for better yields.
Farm equipment and machinery registered a dip in tax rate from 13-15% to 12% under GST. Tractors registered a slight increase from 5% to 12%. But tractors for agricultural use below 1800CC engine capacity still attract 0% tax.
Overall, lower tax incidence has reduced capital costs, facilitating the modernization of farming operations. Thus, by cutting taxes on inputs, GST has helped lower production costs in agriculture, improving profit margins for farmers.
- GST rates on seeds, fertilizers, and pesticides lowered: These key agricultural inputs attracted VAT ranging from 5% to 15% in the pre-GST regime. Under GST, the rates have been reduced to nil or 5%, leading to a decline in input costs.
- Lower tax on farm machinery: Taxes as high as 14.5% on agricultural equipment like tractors and harvesters under the old system have come down to 12% in most cases under GST. This has made farm mechanization more affordable.
- Increased availability of working capital: Lower input costs and easier compliance have improved liquidity positions of agri-input manufacturers and dealers. This ensures an adequate supply of inputs to farmers.
- Positive impact on production costs and profitability: A NABARD study found a 3-8% decline in input costs across major crops after GST implementation. This has boosted farmers’ income levels by 5-12% for most crops.
Thus, by reducing taxes on agricultural inputs, GST has helped cut production costs and enabled farmers to increase productivity and bolster farm incomes.
GST and Agricultural Outputs
The GST rates on most agricultural food products, including cereals, meat, fish, fruits, vegetables, milk, and eggs, are either exempted or charged at 0-5%. Only luxury or value-added food items attract a 12% or 18% tax.
Unprocessed cereals like paddy, wheat, and maize have a 0% tax rate under GST, similar to the previous regime. However, processed grains like flour and husk, earlier taxed at 5-6%, attract only 0-5% GST now.
Fresh vegetables, fruits, eggs, and milk had VAT rates of 4-8% previously but have a 0% GST levy now in most states. Processed products like fruit juice, packaged milk, and egg powder also registered a tax rate dip from 12-15% earlier to just 5% GST.
Thus, lower tax incidence has reduced consumer prices for most agricultural items, raising demand. It has also enhanced the ability of food processing companies to offer better procurement prices to farmer suppliers due to input tax credits.
The GST regime has also simplified inter-state movement, storage, and trading for agricultural produce by subsuming multiple central and state taxes into one national tax system. This has eased supply bottlenecks, curbed wastage, and helped stabilize commodity prices to the advantage of both farmers and consumers.
- Exempted status for key outputs: Most unprocessed agri-produce, like fruits, vegetables, grains, milk, etc., are exempted from GST, resulting in no additional tax burden on farmers.
- Demand boost from rate cuts: Processed outputs like packaged food, dairy products, and meat, which attracted taxes as high as 22% earlier, have GST rates between 0-12%. This has boosted urban consumer demand.
- Unified market through eNAM: Integration with eNAM has helped farmers discover better prices through a unified agri-market spanning across states instead of just the local APMC.
- Stable farm prices: Though food inflation spiked initially after GST due to higher processed food taxes, it has evened out subsequently. This has led to regular crop prices for farmers.
Thus, GST has created a more unified national market for agricultural produce with stable crop prices and better price discovery for farmers, contributing to enhanced output productivity.
GST and Agricultural Supply Chain
The implementation of GST is expected to boost agricultural growth through higher profitability, better market access, increased investments, and farm mechanization. Lower input costs and stable output prices have improved agricultural profitability since the roll-out of GST in 2017. Farm incomes registered a growth of over 10% in the year after GST kicks in vis-a-vis 2.9% income growth in the preceding year.
Better rural connectivity, smoother inter-state trade, and national market integration under GST have allowed farmers in remote areas to access markets and get better prices by directly selling to institutional buyers.
The exemptions for agricultural equipment under GST have encouraged greater farm mechanization, with tractor and harvester sales growing at 26% and 29%, respectively, in 2017-18 over the previous year. Mechanization has boosted productivity and crop output.
Increased food processing activity under GST has also created additional demand for agricultural raw materials like grains, milk, meat, fruits, and vegetables. This has given the production a further impetus.
As per government estimates, the agricultural sector registered a 2.7% growth in the financial year after the GST roll-out, significantly higher than the 0.7% growth in the previous year. Thus, by directly and indirectly impacting key drivers, GST has delivered a notable boost to overall agricultural development so far.
- Faster inter-state transport: Removal of inter-state checkpoints after GST has shortened delivery times and turned India into a seamless market. This aids the quicker movement of agri-produce across states.
- Boost to cold storage and warehousing: GST has encouraged the setting up of modern warehousing and cold storage by offering tax incentives. This helps prevent the wastage of perishable agri-goods.
- Increased food processing: Lower GST rates have provided an impetus to growth in the food processing sector. This helps reduce wastage, prolong shelf-life, and improve price realization for farmers.
- Streamlined supply chain: With input tax credits, uniform registration, and more straightforward compliance, GST has helped streamline the agricultural supply chain from the farm to retail outlets.
Thus, GST has helped modernize agri-logistics, leading to reduced wastage, more significant processing, and more efficient supply chains, ultimately boosting productivity.
GST and Agricultural Growth
The introduction of GST has helped ease bottlenecks in the agricultural supply chain in terms of transportation, storage, processing, and marketing of farm produce. Agricultural transport, including loading, unloading, and warehousing, earlier suffered cascading tax effects due to excise, VAT, and entry taxes levied by state and central agencies. Under GST, these multiple taxes have been subsumed, reducing costs by 15-25%.
Cold storage charges also attract only 18% GST versus VAT of 14.5-15% earlier, along with 4% service tax previously. Uninterrupted input tax credits have lowered storage costs, encouraging investments in cold storage, controlled atmosphere chambers, and other post-harvest infrastructure.
Food processing suffered double taxation under the earlier regime due to excise on manufactured products and VAT on inter-state sales. GST has eliminated this tax anomaly, encouraging the growth of agro-processing centers.
Agricultural markets across India have been integrated into the eNAM platform for better price discovery. This, combined with lower GST rates, has eased the pan-India trade in cereals, pulses, spices, fruits and vegetables, oil seeds, poultry, dairy, meat, and fish.
Thus GST has significantly improved the efficiency of the agricultural supply chain by cutting wastage and transaction costs and making agricultural trade more vibrant across India.
- Increased farm trade: A unified GST regime has given a boost to inter-state trade in agricultural commodities following the dismantling of local taxes and checkpoints at state borders.
- Better income and employment: As per NSSO data, the monthly income of agricultural households has increased by over 22% in the post-GST period compared to pre-GST. Higher rural incomes have raised living standards.
- Boost to allied sectors: Sectors allied to agriculture, like animal husbandry, dairy, and fisheries, have seen a sharp jump in growth rates after the implementation of GST due to its supply chain efficiency.
- Increased agri-credit flow: Greater formalization of agri-trade under GST has facilitated the flow of institutional credit from banks and NBFCs to the farm sector, resulting in investments in productivity.
Thus, GST has delivered a boost to allied sectors, leading to a rise in farmer incomes, living standards, and credit flows, ultimately contributing to higher productivity.
The introduction of GST in India has had a largely positive impact on the agricultural sector, leading to enhanced productivity and farmer welfare. By rationalizing taxes on inputs and outputs, creating a unified market, and streamlining supply chains, GST has helped to reinforce agricultural growth.
However, further simplification of GST procedures related to agri-insurance, lowering rates for farm equipment, and bringing petroleum under the GST ambit can help maximize the gains of GST in agriculture. Implementation of the new farm laws along with GST can catapult the sector into a high-growth trajectory.
Though some initial glitches and food inflation were witnessed, substantial benefits have accrued over time as GST has stabilized. The reform has integrated fragmented markets, boosted capacities in agro-processing, increased farm trade across states, and enabled the modernization of agricultural value chains. With adequate policy support, GST can profoundly transform Indian agriculture by augmenting farmer incomes and food security on a sustainable basis.
How has GST benefited farmers?
GST has helped farmers by reducing taxes on most agricultural inputs like seeds, fertilizers, equipment, etc., leading to a decline in the cost of production. Further, the seamless transfer of input tax credit has improved the availability of inputs. GST has also enabled pan-India access to markets via smooth inter-state transport, expanding sales avenues. This has resulted in better price discovery and higher realization for farm produce.
How has GST lowered transportation overheads?
GST has unified India into a single market by removing inter-state check posts. This has eliminated waste of perishable goods and fuel at border checkpoints. GST has also reduced documentation since e-way bills replaced multiple state permits. Overall logistics costs have declined by 20-30%. This has enabled wider distribution networks for farm produce.
What cost savings arise in the agri supply chain?
Savings via GST have been achieved in storage and processing infrastructure like warehousing, cold storage, and collection centers. Lower tax incidence under GST compared to before has made such large-scale infrastructure creation easier. This brings down wastage in the supply chain and adds value to farm goods.
How has GST eased agri inputs for farmers?
GST has reduced taxes on the majority of agricultural inputs like seeds, fertilizers, and equipment, leading to a decline in their prices, thereby lowering the cost of cultivation. GST has also allowed a seamless inter-state flow of inputs via input tax credit, improving availability across India.
What GST rates apply to agri outputs?
Most agricultural produce like fruits, vegetables, and food grains are exempted from GST, keeping basic food affordable. Few outputs, like packaged foods, attract 5% GST, allowing input tax credits. For processed/branded foods, 12% and upward GST rates apply.
How has GST aided food processing and value addition?
GST has reduced the cumulative tax burden on the food processing industry from 20-30% previously to 15-18% levels. This has stimulated private investment in storage infrastructure and processing capacities across India. Consequently, value-addition to farm produce has increased, raising prices and farmer incomes.
How does GST benefit small farmers?
Small farmers with turnover below threshold limits can opt for the Composition Scheme which allows them to file simple returns quarterly sans input tax credits. This reduces the compliance burden, though some concessions are transitional to promote their integration into GST.
Has GST increased tax revenue from the agri sector?
Earlier, much of the agri sector was exempt from taxes, leading to revenue loss. Under GST, more comprehensive coverage of allied agri services like warehousing, logistics, etc., has increased the tax base. Further, many products, when branded, packed, or processed, now attract GST. This has raised revenues.
What are some challenges in GST for agriculture?
Complex registration and reporting mechanisms pose hurdles for small farmers with low IT familiarity. Further items like electricity, agri-land, and farm equipment still fall outside the GST ambit, leading to input tax load. Progress of eNAM module integration with the GST portal could be faster.
What is the future outlook of GST for agriculture?
Over time, more packaged food items and agri-inputs are likely to come under the tax net, widening the base. The availability of input tax credits on key inputs will enhance the ability of the agri sector to absorb future tax rises. In the medium term, GST will promote commercialization, value addition, and infrastructure growth, giving a significant boost to agriculture.