No role of GST in sugar price-hike

ISLAMABAD: Was the export of sugar justified? Did the subsidy given by Punjab government on sugar export play any role in controlling the prices? The inquiry report on sugar crisis proves that the beneficiaries of these policies were sugar mills owners, rather than general consumers.

With the export of sugar in January 2019, the price of sugar started increasing immediately in the local market. The sugar exporters gained benefit in two ways. First they were able to gain a huge sum of subsidy from the Punjab government and secondly, they made profit from the increasing sugar prices in the local market. The sugar price increased from Rs55 per kg in December 2018 to Rs71.44 per kg in June 2019.

According to the inquiry report, the GST increase played no role in the sugar prices’ hike. The GST was implemented from 1st July 2019 whereas the prices were increased before the implementation of enhanced GST rate.

While explaining the price mechanism and role of GST on sugar prices, the report says that the prices of sugar had started to increase from December 2018. The retail price of sugar in December 2018 was Rs55.99 per kg and started to increase with every passing month and reached to Rs71.44 per kg in June 2019.

It is pertinent to mention here that there was no increase of GST at that time. As can be seen, the real increase in the retail price happened between December 2018 to June 2019, when itwent up by about Rs16 per kg. Similarly, the major increase in ex-mill price occurred between December 2018 to June 2019 when it increased by almost Rs12 per kg which is from Rs51.64 to Rs63.59 per kg. This period saw no increase in sales or other taxes and the price of sugarcane, the major input, was also stable. The increase in retail price between July 2019 to January 2020 is from Rs, 71 per kg to Rs. 74.64 per kg. The data, therefore, does not show any major affect of GST on retail price.

“GST in the financial year 2018-2019 was 8 percent for the filers and 11 percent for the non-filers purchasing sugar from the sugar mills. But since majority of the buyers were non-filers so the GST was charged at 11 percent in majority of the cases. In the current financial year 2019-2020 the government has increased the 35T to 17 percent across the board. The revenue of FBR from sugar sector, in terms of sales tax, has increased 62.3 percent; the increase in revenue is not proportionate to increase in G5T. The same increase is transferred to the consumers ultimately as it is included in the ex-mill price calculations of PSNIA. Furthermore, the FBR calculates the minimum ex-mill price of sugar at Rs60 per kg irrespective of the fact that it may be lower. Hence the GST on sugar is Rs10,20 per kg at the rate of Rs60 per kg ex-mill price. Any additional price over the minimum baseline is to be proportionately added @ 17 percent for the additional price,” the report says.

The Punjab government allowed subsidy of Rs5.35 per kg and a total amount of Rs3 billion was allocated on the export of sugar. The Punjab government was providing subsidy for export of sugar at a time when the price of sugar was increasing in the domestic market. Out of 0.752 million tons of sugar exported, 0.474 million tons (62 percent) was exported before the withdrawal of subsidy and the remaining 38 percent was exported after the withdrawal of subsidy.

It is also worth mentioning here that Rs3 billion were allocated by the Punjab government for the subsidy (From January 2019 onwards) but Rs2.47 billion were utilised from 15th January to 24th May 2019. It can be seen that the sugar mills owners who availed maximum subsidy had political clout and influence in decision making and they tried to gain maximum benefit in a very limited time. A deeper assessment of the reasons for awarding of subsidy after associating the government and the mill owners/beneficiaries is required which would be done by the Commission.

“The export of 1 million tons of sugar was recommended during the Sugar Advisory Board (SAB) meeting held on 11" September 2018 as excess sugar was available. The ECC approved the export of 1 and 0.10 million tons of sugar on 2nd October and 4th December 2019 respectively. However, during the same meeting, secretary Ministry of National Food Security raised the issue that low production of sugarcane was expected in the upcoming season due to water shortage. Despite that the export was recommended and without making it time-bound. In the meeting of SAB held on 15th April 2019 and 6th May 2019, Punjab raised concern over the rising prices of the sugar in the local market,” the report says.

The report further highlights that the issue of increasing price of sugar was discussed in the subsequent meetings in June 2019 as well but no decision was taken recommending ban on export despite the fact that estimated stocks calculation presented during the meeting showed net stocks as negative 0.191 million tons (excluding the stocks of seven sugar mills of Sindh). Finally, the ban on export was recommended on 28th January 2020 and the ban was imposed on 19th February 2020.

“Analysis shows that prior to permission of sugar export, the retail price of sugar was around Rs55 per kg. But as the export of sugar started, the price of sugar started to increase and kept on increasing with the increase in the export quantity. The market players knew that the sugar stocks are running low in the country, hence with increasing exports the price kept on increasing consistently every month. In April and May 2019, maximum quantities were exported and price jumped accordingly,” says the report.

It is pertinent to note here that in October 2019, Secretary MoIP wrote a letter to all the provincial chief secretaries and showed his concern over the increasing prices of sugar: after the meeting of Sugar Advisory Board -- but even then, no decision was taken to ban the export of sugar. Rather the rising prices of sugar were considered to be a result of hoarding and not of export of sugar.

The Punjab government summaries stated that the prices had increased and the export should be banned but no mention of this fact is reflected in the minutes of the SAB meetings held in 2019. It is also very noticeable that the SAB in its meeting dated 20-06-2019, despite the clear calculations that the stock position will be negative after deducting the strategic reserves still did not ban the export of sugar.

Similarly, the committee has further warned that the provincial governments need to take stern action against the people involved in Satta. “Strict legal action is required by the provincial governments which should be started immediately as people involved in such business are speculating a severe price hike in the holy Month of Ramazan. The Satta rates are now about Rs100 per kg for Ramazan.

The provincial governments have information available through their special branch about the Satta dealers and action can be taken immediately,” the report says.