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Rationalise GST To Boost Farm Mechanisation

India’s stressed farm sector is gasping for a fresh breath, which the Centre can facilitate by rationalising the Goods and Services Tax (GST) on farm equipment in the FY 2022-23 budget.

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India’s stressed farm sector is gasping for a fresh breath, which the Centre can facilitate by rationalizing the Goods and Services Tax (GST) on farm equipment in the FY 2022-23 budget. At present, GST slabs applicable for agri-implements are irrational. GST rates applicable on tractors is 12 per cent. It is worth mentioning that before July 1, 2017, there was zero excises and value-added tax (VAT) applicable on tractors. The era of GST has hit the farm mechanisation sector like anything. The farmers have to pay Rs 60,000 GST on the cost of a tractor Rs 5 lakh at 12 per cent which was nil four-and-a-half years back. Government should at least rationalise the GST on tractor to boost farm mechanisation. A unified GST rate of 5 per cent on tractors, their components instead of 12 per cent, will be ideal for the sustainable promotion of mechanisation.

There is a strange dichotomy in the government’s approach, which also puts a question mark on any claimed intent to empower farmers. Under the Rashtriya Krishi Vikas Yojana (RKVY) and the National Food Security Mission (NFSM), the government is offering subsidies up to 50 per cent of the cost of machinery such as tractors, combine harvesters, sugarcane harvesters, cotton pickers, for establishing custom hiring centres (CHCs) and also to individual farmers for buying pump sets, tractor mounted sprayers, zero till and seed drills. On the other hand, there is a heavy GST on agri-implements. Why have a fat GST slab for farm equipment when the government is giving up to 50 per cent subsidy benefits to farmers?

Similarly for the promotion of renewable energy, 5 per cent GST rate is applicable on biogas, solar, windmills devices and electronic parts. Why can’t we have similar affordable slabs for the promotion of mechanization among small and marginal farmers? Because of the Centre’s commitment to a unified and simplified taxation process, there is a need to consider re-assessing numerous harmonised system (HS) codes for different categories of farming equipment and group them under a single tax slab to facilitate the use of farm equipment in the country.

The ramifications of high steel prices have already multifaceted the agri-implements industry. In budget 2021-22, Finance Minister Nirmala Sitharaman had revoked the anti-dumping duty (ADD) and countervailing duty (CVD) on certain steel products while reducing customs duty uniformly to 7.5 per cent from 10-12.5 per cent levels, to be brought down further to nil. The import of second-grade steel should be restored to create more availability for a level-playing field.

Farm mechanisation in India is still not adequate. It requires heavy investments. The overall farm mechanisation in India has been lower at 40-45 per cent as compared to other countries such as the US (95 per cent), Brazil (75 per cent), and China (57 per cent). With the shrinking land and water resources and labour force, mechanisation has become important for production and post-harvesting operations. 

In the last ten years, agriculture credit increased by 350 per cent. Despite an increase in agri-credit, even today 90 per cent of tractors and other agri-implements sold in the country are being financed by NBFC (Non-Banking Finance Companies) at 18 per cent rate of interest whereas banks’ long-term loans rate of interest for purchasing of the same is 9 per cent, but the financing of agri-implements is not prioritised by the banks. There is a need to reform the agri-credit system to fill the gap to reach out to maximum small and marginal farmers for farm mechanisation.

Domestic sales of tractors have increased from 4.82 lakh units in FY 2010-11 to 9.88 lakh units in FY 2020-21, registering an impressive CAGR of 10 per cent.  Traditionally, tractors and tractor-led devices have dominated farm equipment use, largely helping in land preparation, sowing and other activities which require mobility. Tractors dominate the farm equipment market in India. The rest of the farm equipment -- sowers, tillers, harvesters, etc., account for 15 to 20 per cent of the market share. It is only because of the lack of knowledge about the benefits of using additional equipment and mechanical practices in terms of productivity and yield, operative challenges, and so on. It is expected that the dissemination of additional farm machinery will increase in the coming years as a result of the growing prominence of mechanisation, impetus of the Government of India and multilateral agencies to mechanisation-based schemes.

The farm machinery industry is poised at an inflection point from where it is set to move into a high-growth period and expected to transform the way an average Indian farmer works in the farm. However, the pace of this transformation would depend on how all stakeholders like farmers, machinery manufacturers and the government work together to provide an appropriate policy framework, schemes, rationalised GST, financing mechanism and technology that is suited for a diverse climate and environmental challenges. 

The ‘magical’ character of farm mechansation needs a booster dose. Increasing R&D spending on mechanisation is not only a vital necessity for ensuring national food security but also important from the socio-economic point of view. The onus is now on the Central government to increase special financial allocations for research and development in farm mechanisation. 

Way Forward

Enabling factors such as minimum GST on farm implements will be a big boost to manufacturers. This will also contribute towards reducing the overall capital cost and provide sustainable mechanised solutions to the majority of small and marginal farmers through better affordable interventions.

As in Australia and Canada, there is a need to establish an agri-specific council along the functional lines of the GST Council. This council will explore a mechanism to reimburse GST paid by farmers during the purchase of agri inputs including farm equipment.

To ensure a rationalized subsidy support mechanism, a single minimum GST slab will be pivotal for the successful dissemination of mechanisation. Mechanisation is still a cost-intensive activity to be undertaken by farmers. For this, a collective call should be taken by the GST Council for a uniform and minimum tax slab for better uptake of farm mechanization at large.


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AS Mittal farm mechanisation

A.S. Mittal

Vice-Chairman of Sonalika Group

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