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Confusion prevails over sharing burden of excise duty on fertiliser
March, 10th 2011

There is a growing fear in the government over the fallout of a politically sensitive move in the Budget to impose 1% excise duty on urea for the first time ever. According to a recent exchange of communication between two senior government officials, fertiliser supply to farmers may be cut off with companies beginning to hold back stocks.

The government controls urea prices and compensates fertiliser companies by paying the difference between the cost of production and the sale price as subsidy.

The price of urea has been fixed at Rs 5,310 per tonne this year. The 1% excise duty will increase the price by another Rs 53 per tonne. The confusion now is over who will bear the extra burden. While finance ministry is of the view that the excise burden should be borne by manufacturers, fertiliser companies are unwilling to pay up and want the burden to be passed on to farmers.

"The ministry has not spelt this out in any way," said an industry source. But given the politicial implications , the department of fertiliser has taken up the matter with the agriculture department. In a communication , the former has suggested that necessary amendments should be issued at the earliest as "dispatches of urea have been stopped by all urea manufacturing units.

The levy of excise duty shall increase the price of urea by Rs 2.57 per bag which shall be an additional burden on the farmer, said a senior official of the department of fertiliser. The government's pays a total subsidy of Rs 50,000 crore to fertiliser companies.

According to U S Awasthi, managing director, Iffco, if the sale price of urea is constant, the extra excise duty will have to be paid by the farmer. It cannot go from the companies pocket. However, there is no clarity on the issue. Iffco though has not stopped movement of fertilisers.

No company should stop dispatches because it is unfair to farmers , he said. Close to Rs 40,000 crore of feritiliser is sold to farmers every year. A levy of 1% duty will enable the government collect Rs 400 crore. The government has removed 130 items from the list of exempt goods. The effort is to prepare the ground for transition to a unified goods and services tax regime, sans exemptions" , said Mahesh Purohit, Director , Foundation for Public Economics and Policy Research.

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