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Decontrol sugar, remove levy obligation

Last updated on: March 14, 2012 18:45 IST
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The World sugar production is estimated to be 175.8 MT for 2011-12 sugar season with consumption of 166 MT with second consecutive year of surplus.

This is based on the available trends in major sugar producing countries as the sugar cane and sugar output is not likely to improve further leading to the balanced situation of demand and supply and a negligible increase in the year end stocks.

The Indian sugar production expected to be higher by 7% to 26 MT for the sugar season 2011-12. The increase is attributable to an increase in the cane area due to remunerative increase in cane price in Uttar Pradesh and Maharastra.

Significantly, the October-January period of 2011-12 sugar production has touched 13.3 million ton up by 17% from the same period previous year.

As per the ISMA latest updates, the country has produced 161.3 lakh tonnes of sugar till 15th February 2012 as compared to 140 lakh tonnes in the corresponding period of sugar season 2010-11.

The sugar production till 15th February 2012 is about 15% more than the same period last year. As against 502 mills, which were operational in 2010-11, 524 mills are operational as on 15th February 2012.

Also, Maharastra has produced 56.60 lakh tonnes of sugar till 15th February 2012, 14% higher than last year. The recovery rate is 11.20%.

Notably, Uttar Pradesh has produced 45.18 lakh tonnes of sugar, which is about 13% higher than last year on account of 16% increase in cane crushing as compared to last year. The recovery reported is 8.75%, which is less than last year of 8.96%.

Further, The southern states of Karnataka & Tamil Nadu have also reported higher production of 25.3 & 7.10 lakh tonnes respectively.

Andhra Pradesh has reported 23% increase in production to 7.30 lakh tonnes with a highest recovery than last year. ISMA still maintains that the sugar production will be 26 MT in the current season 2011-12.

Budget Expectations: Remove levy sugar obligation

The sugar industry is the only industry in the country required to supply 10% of its production to the Government as Levy sugar for the PDS at a pre-determined price fixed by the Government.  These prices are substantially lower than the open market price as also to the cost of production.

The Financial burden of supplying levy sugar for a social welfare programme of the Government is borne by the sugar industry.

Further, there is no other sugar industry in the world with similar burden including the lower developed countries.

This makes the sugar industry less competitive and prohibits payment of good price to the farmers.

Provide tax incentives for Mechanical Harvesting Equipments usage

The Sugar industry undertakes extensive sugarcane development activities linked to cane growers. Generally it will devise various subsidies and cash assistance to promote irrigation infrastructure, introduce drip irrigation, develop new cane varieties and introduce best farm practices.

However, the labor is migrating to more lucrative avenues such as manufacturing and service sector. Also, the government welfare schemes like NREGS have also significantly enhanced cost of farm labor. This led to increasing stressful for sugarcane growers to source adequate and cost effective labor.

The alternative to this is Mechanical Harvesting, which is highly capital intensive but cost effective. The harvesting equipment that are mostly imported costing over Rs 1.50-20 crore per equipment for large harvesters and Rs 0.50 crore for small investors requires suitable tax break.

The Government has effectively encouraged energy efficiency and pollution abatement measures through higher rates of depreciation at 80% plus initial depreciation of 20%.

Now the sugar industry seeks similar patronage for mechanical harvesters be introduced with a depreciation rate of 80% with further eligibility for additional deprecation 20% in the first year.

This will bring down the income tax incidence of the sugar sector, if it were to buy the mechanical harvestors and give them on rent / other suitable mode to the farmers.

Even otherwise, the effective cost through the lifecycle of the mechanical harvestor will come down, if higher depreciation is allowed for the Income Tax computation purpose.

Cenvat Credit on Bagasse

The sugar mills either has to pay excise duty on the sale value of bagasse at 5% or in the alternative suffer pro-rata cenvat disallowance under rule 6 of cenvat credit rules 2004.

However, The Government should clarify that there shall be no pro-rata disallowance of Cenvat Credit on input material or services merely by reason of production of bagasse that is characterized as a waste product in the schedule attracting nil duty of excise.

Service Tax exemption for labor mobilization for cane harvesting

The Sugar industry assists cane growers at every stage of crop cultivation including its harvesting to the sugar mills. It also helps the farmer in getting adequate cane harvesting labor and in time.

Further, due to the non-availability of adequate labor force sugar mills pay advance money to gang leaders to mobilize labor and then recover it out of harvesting charges that are actually required to be borne by cane growers.

In the end, the sugar mills pay only the cane price as stipulated in law but not collect any separate charges / fee for labor mobilization.

In recent times, the certain central excise collectorates have started demanding Service tax on the entire harvesting charges on the ground that it is a service under BPO category.

It may be appreciated that sugar mills role is only confined to mobilizing labor and therefore does not require any service charge therefore. In any event, Service tax even if so paid should qualify for commensurate cenvat credit. It however gives rise to avoidable workload and complexities and burden on farmers.

It is hence requested that CBEC should issue a specific clarification that assistance rendered by sugar mills towards labor mobilization without charging for such services is not eligible to service tax.

The tax deduction under Section 35 AD under income Tax Act for investment in warehouse for sugar

In the budget 2011-12 announced the encouraging investment in warehouses for agricultural produce storage by way of insertion of Section 35 AD in the income Tax Act. The deduction is granted during the first year for setting up and operating warehouses for agricultural produce storage.

The Sugarcane is an agricultural produce but it is not amenable to storage after harvesting in the form of cane, as sucrose content in it deteriorates very quickly.

As Such, it is to be crushed almost immediately and it can be stored only in the form of sugar. The sugarcane is harvested in 5 to 6 months in a season and therefore sugar is produced in these 5 to 6 months only.

However, since sugar industry is under the control of the Government sugar can be sold by the sugar mills as per the release orders issued by the Government and there by, sugar required to be stored for 12-18 months, so, that can be made available in the country throughout the year.

The Capacity of the sugar mills to pay reasonable and timely payment to cane farmers depends on the realization made by the sugar mills mainly from sale of sugar. However, in view of restrictions/controls on its sale sugar so produced is to be carried for over one year.

In order to extend the benefit of Section 35 AD to such an important crop like sugarcane, of which India is the largest consumer and second largest producer in the world, it is necessary to include warehouses for storage of sugar under the section especially since sugarcane itself cannot be stored.

To extend benefit of the provisions of the income tax act to the cane farmers, it is necessary to clarify that investment in warehouses for sugar is included in the section 35 AD.

It is estimated that investment to store 2 to 3 million tons of sugar would be around Rs 100 to Rs 125 crore.

Levy of VAT on Sugar

Under the provisions of additional duties of Excise (Goods of Special importance) Act, 1957, additional excise duty was leviable at the rate of Rs 17 per qtl on levy sugar and Rs 37 per qtl on free sale sugar was in lieu of sales tax. This additional duty was merged with the basic excise duty in 2006.

The omission of sugar in 2010 from the schedule of the additional duties of Excise (Goods of special importance) act 1957 has empowered the state Governments to impose VAT on sugar at a maximum rate of 5%.

It is learnt that a committee headed by shri Sushil modi, Dy CM Bihar is in favor of imposition of VAT on sugar in various states. This will tantamount to increase in taxes on sugar by two times which will not be justified.

Since the additional excise duty, which used to be charged in lieu of sales tax has been merged with basic excise duty in 2006, the levy of VAT at 4% will amount to double taxation on sugar which is unjustified and would result in increase in retail price of sugar.

In view of the above, the  idea to impose VAT of sugar should be dropped or sugar may again be included in the schedule of the additional duties of Excise Act, 1957 withdrawing the merger of additional Excise Duty with the Basic Excise duty.

Analyst Expectation:

Considering relatively poor show of UPA government in the UP elections, deregulation of sugar Industry is highly unlikely any time sooner. Further, the cane arrears are building up in UP area (due to higher SAP price) and this would impact the cane plantations for the next sugar season.

We do not expect any major decisions on Sugar Industry in the budget 2012-13.

Scrip's to Watch:

Shree Renuka sugars, Balrampur Chini mills, Bajaj Hindustan, EID Parry (India), Dhampur Sugars.


The industry seeks removal of levy sugar obligation. However, The Government can procure requirement of sugar for the PDS from the open market instead of making the sugar industry bear the burden similar to the practice it follows in the case of other commodities like wheat, rice etc.

The total additional financial burden that the Government on this account if the sugar is procured is open market by the government is about Rs 2000 crore.

Overall, the Union Budget 2012-13 is likely to be largely neutral for the Sugar Sector.

Union Budget 2012-13: Complete coverage
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