The goods and services tax regime (GST) hasn’t really come as a boon for sugar mills that produce ethanol. The oil marketing companies (OMCs) have asked sugar mills to submit details of the input tax credit (ITC) they get before supplying ethanol for the government’s blending programme, hinting that the ITC amount can be deducted from the price of the bio-fuel payable to the suppliers. Also, the hope that the GST will end all kinds of levies on the inter-state movement of ethanol has been dashed, as states like Gujarat, Delhi, Haryana, Punjab, Maharashtra, Uttar Pradesh, Madhya Pradesh have still not scrapped taxes on inter-state movement of taxes (see the chart), frustrating the notion of ‘one nation, one tax’. In a letter to sugar mills, the OMCs have said: “…As per anti-profiteering provisions under Section 171 of the GST Act, it is mandatory for suppliers to pass on the benefit due to reduction in the rate of tax or from the ITC to the consumer by way of commensurate reduction in price.” “Hence you are requested to give a declaration with details of input taxes forming a part of basic price which are subsumed in GST, duly certified by auditor/statutory auditor of your company, on the elements of input taxes,” the letter said.
According the Cabinet decision in October last year, mills will get a fixed price of Rs 39 per litre to supply ethanol for blending with petrol, while OMCs will bear the burden of excise duty/value-added tax/GST in the ethanol marketing year through November. However, any other levies (by states), such as the one on inter-state movement of ethanol, have to be borne by the sugar mills. Before the GST was implemented, sugar mills were paying a fixed excise duty of Rs 750 per tonne (or roughly 12% at today’s price) on molasses — a cane byproduct and the raw material for fuel ethanol — and 12.5% on ethanol. Around half-a-dozen states used to impose VAT in the range of 5-8% on ethanol. Under the GST, the tax rates on molasses and ethanol have been fixed at 28% and 18%, respectively. However, no GST is payable on molasses used for captive consumption (to manufacture ethanol).
Around 80% of ethanol in the country is produced by integrated sugar mills with distilleries that use their own molasses to produce the bio-fuel. This means OMCs’ instruction to ethanol producers to pass on ITC benefits would impact roughly 20% of supplies (mainly by standalone players or sugar mills buying molasses from other companies to use its excess capacity to produce ethanol). Millers, on the other hand, say the increase in the duty incidence for ethanol to 18% under the GST despite the fact that the government has been seeking to promote clean energy should be reviewed. “The sugar industry was hoping that with the introduction of the GST, such state levies, including on inter/intra-state movement of ethanol, will be scrapped across the country. However, states — including Gujarat, Delhi, Haryana, Punjab, Maharashtra and Uttar Pradesh — continue to impose taxes, despite such levies running contrary to the established laws of the land. Also, excise departments of some states still insist that ethanol suppliers continue to take permits from them. These issues will discourage mills to supply ethanol for the government ethanol blending programme,” said Abinash Verma, director general of the Indian Sugar Mills Association. As such, the first expression of interest (EoI), floated by OMCs, garnered commitments for just 78 crore litres in 2016-17 marketing year (November-October), compared with the actual supply of 111 crore litres in 2015-16, showed the official data. Even the first EoI floated last year attracted supply commitments for 101 crore litres, which was followed by two more EoIs.
Lower ethanol supplies will drag down the blending level to 3% in 2016-17 from the record level of almost 5% in 2015-16, millers said. Interestingly, the government wants the blending level to go up to 10%. Even before the launch of the GST regime from July, a drought had already trimmed cane availability in Maharashtra and Karnataka. On top of that, a withdrawal of excise duty (12.5%) waiver on ethanol and the centre’s move to fix the price of ethanol at R 39 per litre for 2016-17 have together reduced sugar mills’ margin by Rs 7-8 per litre from the last year’s level and have eroded the attractiveness of supplying for the blending programme.
Some mills argue that since agreements for supplies in 2016-17 (November-October) were signed between the OMCs and ethanol producers even before the GST regime kicked in, any renegotiation of the ethanol price, fixed by the Cabinet in October last year, from July itself will be unfair and should be done only from the next season. The government had first proposed the 5% blending of ethanol with petrol in 2003 and made it mandatory in 2007. In December 2013, the Sharad Pawar panel mooted doubling the blending limit to 10%, which was re-iterated by the Cabinet committee on economic affairs in April 2015. In August 2015, Prime Minister Narendra Modi directed ministries concerned to look for ways to make the proposed blending programme a reality soon.