Before the recent GST rate cut, the fertilizer industry in India was facing a major hurdle: a tax imbalance known as an inverted duty structure. Here’s a breakdown of the problem and how the new changes have provided a lifeline to manufacturers.
The Problem: Tax Disparity and Working Capital Blockage
Previously, fertilizer companies had to pay an 18% GST on key raw materials like sulphuric acid, nitric acid, and ammonia. However, the finished fertilizers they sold to farmers were only taxed at 5%. This significant difference meant that for every unit of fertilizer produced, a substantial portion of the tax paid on inputs—a 13% tax accumulation—was getting tied up in the system.
This tax disparity led to severe liquidity pressures and a working capital blockage that particularly hurt smaller businesses (MSMEs). The money that could have been used for day-to-day operations or investments was instead locked up.
The Consequences for the Industry
The negative impact of this tax structure went beyond just cash flow. It also:
- Increased Costs: The process of seeking a refund for the excess tax was cumbersome and expensive, with compliance and liaison costs eating up 3-7% of a company’s profit margins.
- Reduced Competitiveness: The high costs and administrative burden made it difficult for local manufacturers to compete with imported fertilizers, especially from countries like China.
- Hindered Innovation: With their capital tied up, many companies, especially MSMEs, couldn’t afford to invest in R&D or new plant and machinery, stifling growth and innovation.
The Lifeline: GST Rate Alignment
The government’s decision to slash the GST on these raw materials to 5% has been a game-changer. By aligning the input and output tax rates, the GST rate cut has effectively eliminated the inverted duty structure.
This change means:
- Smoother Cash Flow: Manufacturers can now fully utilize their working capital, as cash is no longer locked up in the tax system.
- Lower Financing Costs: With improved cash flow, companies will have lower financing costs, freeing up resources for core manufacturing activities.
- Renewed Focus on Growth: The reduction in administrative and financial burdens allows manufacturers to focus on innovation and strengthening their operations, paving the way for the “Make in India” initiative to drive self-reliance and sustainable growth in the fertilizer sector.