Mid-June tea auctions may lose flavour on high cost, input credit

The Goods and Services Tax’s (GST's) roll-out from July is likely to hurt the tea industry’s mid-June auction. The effective procurement cost for the brokers who sell in the auction centres is going to rise by nearly four per cent; there is also uncertainty over input credit.

The effective rate in the current system varies from state to state, with Assam charging a 0.5 per cent value added tax (VAT) and another 0.25 per cent Central Sales Tax in the auctions. The West Bengal government charges a one per cent flat value added tax (VAT) for sales from the auction centres.

However, for private sales, 60 per cent of Assam’s 600 million kg (mnkg) annual figure and West Bengal’s 70 per cent yearly, the effective tax rates are four and five per cent, effectively.

Apart from the concessional rates the auctioneers enjoy, at each stage of buying after green leaf procurement, the buyers are eligible for input credit, although other rates like octroi or local taxes are not refunded. By industry estimates, the net tax on tea is 8-9.5 per cent, likely to go down to five per cent.

Nevertheless, for auctioneers and brokers, the roll-out translates into an effective increase of nearly four per cent across different auction houses.

In Assam, the net effective rate for inter-state sales will go down from the current nine per cent to five per cent but producers are concerned on how to claim the input tax refund.

Arun Thekedath, chairman, Assam Tea Planters Association, opined that blenders were concerned that if they bought tea from the auctions in the preGST regime at the prevalent rate, how they were going to claim the refund in the post-GST regime.

Usually, the packateers lift huge stocks from the Kolkata and Guwahati auctions in mid-June, when the second flush (crop), considered the industry’s benchmark, arrives. While the procurement is done in bulk quantities and these buyers pay the required upfront tax, they later claim the refund as they gradually destock during the rest of the year.

As a result on the lack of clarity on how this would impact the sales, producers and auctioneers are doubtful about the coming auction. “Blenders and packateers buy from the auctions because of the low tax rate. If it leaps from the current 0.75 per cent to five per cent, why would they be interested?" asks Dinesh Bihani, secretary of the Guwahati Tea Auction Committee.

More, under the current pan-India auction rule, the invoice is raised by the seller, who in 99 per cent of the cases is a broker. But, under the GST regime, the same invoice needs to be raised by the garden owner or producer directly.

“The Tea Board needs to provide some clarity on this. Otherwise, there is going to be huge amount of confusion, which can wreck the coming auction," Thekedath added. Among all the trade auctions, the one in mid-June is the most important, as the year’s best produce is sold in June-July.

A similar situation prevails in West Bengal and Tamil Nadu, where the state governments provide a four per cent VAT concession on tea auctions and buyers are able to obtain full refund of the input credit. Brokers procure the black tea from factories after paying a five per cent VAT and sell it in the auctions, where the buyer pays one per cent VAT. After the sale, these brokers claim the five per cent refund. However, in these two states, the similar five per cent rate is going to make the pre-GST and post-GST input credit claim process smoother as compared to Assam. “Whenever there is a change in taxation, there is disruption in the trade. It will settle down to normalcy in the coming three-four months,” said Kalyan Sundaram, secretary of the Calcutta Tea Traders Association. He said the gardens would get more input credit under the GST regime.

In Kerala, the GST roll-out will have a neutral impact. "There will be no change when GST comes in, since tea would be taxed at five per cent and we in Kerala are already paying five per cent,” said J K Thomas, chairman, Tea Trade Association. “For the time being, there will not be any change in wholesale or retail prices. As the taxes are being paid by blenders, they will be able to set it off as an input credit."