Subsidy inversion issue in fertilizer Cos

The government is thinking of providing financial relief to fertiliser firms as despite reduction in GST rates of critical raw materials for fertilisers, the issue of subsidy-related price inversion that saw an accumulation of input tax credit for the industry has not been resolved.

“The relief could come in the form of dividends or bonds.

Unlike most commoditiesm fertilizers are not sold at free market prices in India. They are sold below cost to ensure affordability for farmers, with the government giving subsidies to companies after they have sold them. The subsidy is exempt from GST, hence there’s no refund for companies.

However, what farmers pay to such companies is lower than the cost of the product because they typically deduct the subsidy which will accrue to the company post sale. However, the government gives GST refund or input tax credit (ITC) to companies on the price the farmers pay and not on the actual cost accrued to companies on which they have already paid GST.

This persistent flaw in the tax system has locked up close to Rs 3,500 crore in working capital for just a few large fertiliser makers, the Federation of Indian Chambers of Commerce & Industry (FICCI) had said in a letter to finance minister Nirmala Sitharaman before the tax reforms were announced.

“This disparity has led to persistent accumulation of unutilised ITC, blocking critical working capital,” the letter stated, underscoring the strain on manufacturers and importers of phosphatic, potassic and NPK fertilisers.

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