GST to put severe pressure on margins of fertiliser companies

With a backlog of nearly Rs 30,000 cr, increase in subsidy burden will block firms' working capital

Profit margins of fertiliser firms are likely to remain under severe pressure due to an inverse duty structure on finished products versus raw materials, resulting into a large quantum of unused input tax credits.
 

The sale of fertiliser at present is subject to 6 per cent overall duty, including 1 per cent excise duty and 6 per cent value-added tax (VAT). Under the Goods and Services Tax (GST), however, the total tax incidence will come to 12 per cent. This means fertiliser firms would require compensation for an additional 6 per cent duty in the form of a proportionate increase in subsidy -- a self-created problem for the government.

Fertiliser manufacturers would need to raise the maximum retail price (MRP) to pass on the additional tax burden to consumers. Under this option, prices of urea and diammonium phosphate (DAP) are likely to rise by 6-11 per cent, while the cost of other products, including nitrogen, potassium and phosphorus or NPK and muriate of potash (MOP), would increase by 8.10 per cent.

"For complex fertiliser producers, key raw materials -- phosphoric acid and ammonia -- will attract 18 per cent GST, while finished products will be taxed at 12 per cent. Due to the subsidy element for finished goods and a relatively low value-addition in this business, the tax incidence on raw materials will be higher than that on finished products, thereby, resulting in unused input tax credits for the industry and blocking of working capital with tax authorities. This will also put importers of DAP/NPK fertilizers at an advantage over domestic manufacturers and could lead to weakening of profit margins for the latter," said K Ravichandran, Senior Vice-President and Group Head, Corporate Ratings, Icra.

Since Finance Minster Arun Jaitley has denied the possibility of credit outflow, meaning that the input credit would notbe allowed to exceed the prescribed limit, fertilizer firms would face additional pressure for unused input credit.

"Northern Indian states like Punjab, Haryana and Uttar Pradesh (UP) has no valued added tax on sale price of fertilizer and hence price rise for them will be higher. UP only has a tax levy on nitrogenous and sulphur content of fertilizers," said Deepak Chitroda, lead analyst for fertilizers at commodity research firm CRU in London.

He added that the proposed regime would be challenge for may firms inclduing IFFCO, Chambal Fertilizer, Indian Potash and Kribhco, among others. According to Chitroda, pirces of fertilzers are expected to rise after a 12 per cent GST levy even after taking account of the tax credits, besides increasing the subisdy burden for the government. 

With the fertiliser industry already reeling under a subsidy backlog of nearly Rs 30,000 crore, any increase in the subsidy burden will lead to a further blocking of working capital for companies till subsidy is reimbursed.

Another matter of concern for the fertiliser segment would be the levy of GST on inter-state stock transfers, which are tax free under the present regime due to various concessions. However, under the GST regime tax will be levied on inter-state transfer of goods between related parties as well. As a result of this, higher taxes will have to be paid upfront by the industry during the dispatch of fertilisers leading to increased working capital requirements.

"As natural gas remains outside the ambit of GST, fertiliser companies will not be able to claim input tax credit on the taxes paid on finished goods, leading to a continuation of the cascading effect of taxation. For urea producers in particular, the non-inclusion of natural gas, which accounts for 75 per cent of the cost of production, from the GST regime will be a key issue apart from the issue of 15 per cent VAT charge in certain states," said a senior official with an equity broking firm.

Moreover, compliance burden will increase for the urea industry as they will have to deal with both the existing tax regime and the GST.