State taxes eat up 14% of food subsidy bill
If you’re wondering why various state governments are opposed to larger agricultural reforms like removing the stranglehold of government-controlled mandis over all farm sales—FDI in retail is just one part of this—look no further than the incomes they earn from this. According to data collated by FE, a whopping 14% of the country’s food subsidy bill is accounted for by taxes paid by FCI for being allowed to procure grain in states like Punjab and Haryana. Of the total food subsidy bill of R72,800 crore in FY12, around R10,000 crore will be paid in terms of various mandi taxes—of this, Punjab will get around R3,600 crore and Haryana R1,400 crore. While Punjab charges a 14.5% tax on all purchases by the Food Corporation of India (FCI), Haryana charges 10.5%. Andhra Pradesh charges 12.5% and earns R900 crore while Madhya Pradesh earns a similar amount from its 4.7% tax. Add to this the taxes collected from other sales in mandis, such as of fruits and vegetables, and the amounts get even higher. Indeed, while many argue FDI in retail will allow farmers to get better prices, the real killer is that most states insist that all sales take place in farmer mandis set up by them. This raises costs hugely because of the tax component and, since the mandis tend to be controlled by a cartel of traders, also raises the gap between wholesale and retail prices to as much as 100% in most cases.
How important this tax is can be seen in the case of states like Punjab. While Punjab’s total tax revenues in FY12 were R24,070 crore and its own tax revenues were R20,410 crore (the difference is the state’s share of central taxes), the mandi taxes at R3,600 crore accounted for nearly 18% of own taxes. In the case of Haryana, mandi taxes accounted for around 7% of the state’s own tax revenues of R20,010 crore. While both states are in favour of FDI in retail—in Punjab, though, the SAD changed its stance to placate the BJP—the real question is whether, once this is brought in, they will remove the mandi’s stranglehold over the farmer. Indeed, if the mandi’s stranglehold is removed, and mandi taxes no longer have to be paid, private traders can procure more from farmers, lowering the need for large procurement by FCI. Without this basic reform, however, the chances of FDI in retail making a difference to the farmer’s lives are low.