A fat tax: GST on ghee, crashing global powder prices take cream off dairy farmers

Bapu Yede, like many in Palasdeo village of Pune district’s Indapur taluka, had wholeheartedly participated in the ‘Shetkari Sampa’ or farmers’ strike early this June. He joined the movement, stopping supply of all produce to urban centres, mainly in the hope of realise a better price for his milk. The week-long stir culminated in the Maharashtra government hiking its procurement price for cow milk, containing 3.5 per cent fat and 8.5 per cent SNF (solids-not-fat), from Rs 24 to Rs 27 a litre.

Till around end-July, Yede was actually getting the officially declared rate for the 30-35 litres of milk he supplies daily from his three Holstein Friesian crossbred animals to the Sonai Dairy at Indapur. Since August, though, the company owning it — Indapur Dairy and Milk Products Ltd — has rolled back its price to Rs 22.5 per litre. Most private dairies in Maharashtra are today paying Rs 21-23 a litre. The cooperatives are continuing to give Rs 27 to producer-members, but only Rs 22-23 for milk collected from farmers outside their core district areas.

“I hear they (dairies) may reduce prices further, maybe to the Rs 18/litre levels of 2016,” fears Yede, who grows sugarcane on five acres and devotes the remaining two out of his seven-acre holding for cultivating fodder jowar (soghum), maize and napier or elephant grass. “At Rs 22.5/litre, my monthly revenue from 30 litres per day comes to Rs 20,250. As against this, I spend Rs 13,500-14,000 on fodder and feed concentrates alone. Adding family labour and other unpaid expenses leaves me, as it is, with nothing. If prices dip to below Rs 20, I will have no alternative but to sell my animals,” he adds.

Dairies, especially in the private sector, attribute the falling milk prices to two factors.

The first is a crash in international skimmed milk powder (SMP) prices. Since the start of this calendar year, SMP rates at GlobalDairyTrade, the fortnightly auction platform of New Zealand’s dairy giant Fonterra, have plunged from $2,660 to $1,797 per tonne. These rates are close to their all-time-low of $1,419 per tonne in August 2015 and way below the record $5,142 scaled back in April 2013. Dipping global prices has led to domestic SMP realisations, too, dropping from Rs 220-225 to Rs 155-160 per kg between January and now.

The second factor has to do with the goods and services tax (GST). Prior to the new indirect taxation regime’s introduction from July 1, butter, ghee and other milk fats attracted an overall duty incidence of 5-6 per cent. With GST, that has gone up to 12 per cent, even as there isn’t any duty on liquid milk per se.

“Both these — crash in SMP realisations and 12 per cent GST on milk fat — have hit us particularly hard. Unlike cooperatives, which are mainly into liquid milk marketing, our revenues come predominantly from production and sale of commodities such as SMP, ghee and white butter,” notes Dashrath Shrirang Mane, chairman of the Sonai Dairy. His dairy procures about 17 lakh litres per day (LLPD), of which only two lakh litres is sold as pouched liquid milk and the rest mostly converted into commodities.

Rajiv Mitra, managing director of the Satara-based Govind Milk and Milk Products Pvt. Ltd, makes a similar point. “We are now paying 5 per cent GST on SMP and 12 per cent on ghee/white butter. And since there is no GST on our raw material (milk), we cannot avail any credit on input tax either,” he observes. His dairy procures 6 LLPD and, like Sonai, sells only 2.5 LLPD as pouch milk under its ‘Govind’ brand.

Private players have an estimated 60 per cent share of the total 150 LLPD or so milk handled by organised dairies in Maharashtra. Many of them — specifically those dealing in cow milk fat — had incidentally benefited, when the Yoga guru Baba Ramdev’s Patanjali Ayurved Ltd launched its branded cow ghee. The latter, in early-2016, was reportedly sourcing white butter, containing 82 per cent fat, from dairies in Maharashtra, Karnataka and Tamil Nadu at Rs 190-200 per kg, while retailing the end product (ghee has 99.5 per cent fat) at around Rs 450 per litre (one litre of ghee equals 910 grams). As Patanjali’s procurement grew — it accounts for anywhere between 1,200 to 1,800 tonnes of the country’s branded cow ghee market of 3,500-4,000 tonnes a month — so did the price of white butter. With white butter currently fetching Rs 290-300 per kg — they had touched Rs 360 levels in January-February – Patanjali has had to raise its own ghee retail price to Rs 560-580 a litre.

“The 12 per cent GST has affected us much more than Patanjali, as it is paying the same rate on its raw material (white butter), which partially at least offsets the increase in duty incidence on the final product. We don’t have even that luxury. Dairies cannot claim input credit on their own ghee production, whereas those making it by procuring white butter from us can do so,” says a dairy industry source, who does not want to come on record.

But even cooperatives are not happy. Given that their main product — liquid milk — attracts no GST, there is no scope to offset taxes on inputs. That includes the plastic pouch film, which falls under the 18 cent rate slab. “We cannot afford to also not pay the official Rs 27/litre procurement price. The government issues notices and imposes fines only on us,” complains Vinayak Patil, chairman of the Sangli-based Rajarambapu Patil Sahakari Dudh Sangh, which markets liquid milk under its ‘Krushna Dudh’ brand. Unviable SMP prices and GST, he claims, has resulted in his cooperative dairy registering a loss of Rs 1 crore each in both August and September.

Even bigger a loser is, of course, the dairy farmer. “If milk prices go back to Rs 19 a litre, farmers will most certainly exit dairying this time. And the cost will ultimately be borne by the consumer,” warns Mane. Maharashtra’s dairies have already formed a four-member committee under former Union agriculture minister Sharad Pawar to take up the matter with the Centre. “We are seeking a meeting with the finance minister Arun Jaitley. Our main demand is a reduction in the GST on milk fat to 5 per cent,” adds Mane.


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