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Advisory Price, VAT Breaking The Back of Sugar Mills in Tamil Nadu, Says Assn
December, 04th 2014

Faced with a severe reduction in sugar demand and drop in prices due to a glut in the global and domestic markets, sugar mills in Tamil Nadu are reeling under an acute financial crisis.

The crisis in the State has been aggravated because of two major issues - an inconducive State Advisory Price (SAP) for cane and a recently introduced Value Added Tax, according to the South Indian Sugar Mills Association - Tamil Nadu (SISMA).

“This is by no means a situation confined to Tamil Nadu. But we have some additional problems,” said Palani G Periasamy, president of SISMA and chairman of Dharani Sugars. SISMA is working closely with the government to find a remedy, he said.

Consider this: the 25 private sugar mills in the State suffered losses of `570 per ton of cane crushed last year, which works out to a whopping `675.05 crore for the 118.43 lakh tons. And the price, `2,250, they paid was actually the SAP set for 2012-13. For 2013-14, SAP was set at `2,550, a price the industry just could not afford to give, according to Periasamy.

“The cost of production per ton is `3,405 with SAP at `2,250, while the total realisation from that is only `2,835. If we were to pay the SAP for 2013-14 we would face additional losses of `300 per ton,” he pointed out. But that is precisely what farmers are asking for, pointing to the 18 co-operative societies/ public sector mills that did pay a price of `2,550. “While they were indirectly subsidised,” he said, “we receive no such assistance.”

The SAP is considerably higher than the Fair Remunerative Price (FRP) set by the Union government’s Commission for Agricultural Costs and Prices (CACP). But SAP has been the norm in all major sugar producing states. And the industry, including the one in TN, has been paying the SAP for several years.

“We paid SAP to farmers in good years when we were making profits. Some years we paid even more because we wanted to share our profits with the farmers,” said Periasamy.

But the market has seen a complete turnaround. According to industry figures provided by SISMA, there have been five continuous years of over-production in the country. Besides, the global market is experiencing a glut due to Brazil’s increased production and prices have come crashing down. For Tamil Nadu, coupled with the crashing sugar prices has come a reduction in production caused by drought. The State also has the lowest conversion rate of sugar from cane, at 8.7%.

“Added to this has come the shock of a VAT of 5% that went into effect from November. Last year, the government withdrew the `60 per ton purchase tax. VAT snuffed out that relief,” he said.

“The industry still has as surplus 7.34 lakh tons of last year’s production, for which purchase tax had already been paid. We have to pay `140 as VAT for the same this year because we will be selling them now, an added cost of `200,” he pointed out. The industry can also not pass on the VAT to customers because sugar prices are already at rock bottom.

“Other states like Karnataka and Maharashtra can export sugar to TN at lower prices because they don’t have these costs,” he said. “It is also a myth that sugar mills make money from their by-products. Both the co-gen power production from bagasse and alcohol production from molasses are fraught with issues,” he pointed out.

Sugar mills have an installed capacity of 500 MW but we can only produce power for six months using bagasse. The rest is from coal. “The tariff we get is only `3.15 per unit for plants older than 2006 and `3.77 for others. Other states give considerably more tariff. Many plants are lying idle because mills can’t afford to run them,” he said.

Alcohol on the other hand has VAT of 14.5% while those from other states come in at 2% Central Sales Tax.

“We are praying to the government to do away with the VAT, come out with a revenue sharing cane pricing mechanism to level the playing field, restructure tax on alcohol to reduce imports and announce a reasonable tariff for power,” he said. “Also please include us in the Public Distribution System and offer one-time subsidy to enable us to pay the farmers the money they are demanding,” he added.

The mills cannot even go for funding from banks because it makes no economic sense for bankers to make advances to an industry that is in the doldrums. “One or two of our mills are already in CDR and others are set to follow because of the interest burden. There is no avenue for funding,” concluded Periasamy.

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