The Indian fertilizer industry is on track to achieve self-sufficiency by 2032, supported by robust demand, government interventions, and now, major tax reforms. India, the world's second-largest producer of fruits and vegetables after China, relies heavily on fertilizers to sustain agricultural productivity and food security.1 Recognizing the sector's critical role, the Government has proposed landmark reforms through the 56th Goods and Services Tax ('GST') Council meeting held on 3rd September 2025, that aim to ease input costs and correct structural inefficiencies.
Proposed key GST rate changes
|
Sl. No. |
Product Description |
Current GST Rate |
Proposed GST Rate |
|
1. |
Micronutrients |
12% |
5% |
|
2. |
Bio-pesticides |
12% |
5% |
|
3. |
Fertilizer raw material, namely Ammonia, Sulphuric Acid and Nitric Acid |
18% |
5% |
In addition to the above, it is proposed that agricultural machinery, including tractors and related equipment, are to be brought under concessional GST relief.
Implications for the industry
For years, the fertilizer sector struggled with an inverted duty structure: inputs taxed at 12–18% while finished products attracted only 5%. This mismatch created a pile-up of unutilized ITC, worsened by the exclusion of subsidies from taxable value under Section 15 of the Central Goods and Services Tax Act, 2017 ('CGST Act'). Manufacturers paid higher GST on inputs but could not fully offset it against output tax liability, straining working capital.
By reducing GST on key inputs, the reforms directly address this distortion. The Fitment Committee had resisted such reductions in previous Council meetings, but the new decision acknowledges the need to unblock capital, reduce production costs, and support domestic competitiveness.
The Finance Minister also clarified that this correction of inverted duty has been extended to other agricultural goods, signalling a wider effort to rationalize GST in the farm ecosystem.
Remaining challenges:
- Subsidy-Linked ITC Blockage: Even after correcting inversion, ITC accumulation will persist because subsidies remain outside the tax base. This means a part of GST paid on inputs will continue to remain uncreditable. Further, the current refund mechanism still excludes ITC accumulated on input services, leading to significant accumulation of credits for the fertilizers industry.
- Pesticides at Higher Rate: While bio-pesticides enjoy relief, conventional pesticides (HSN 3808) remain taxed at 18%. This category includes insecticides, fungicides, and herbicides widely used by farmers. Rationalizing their rates to 12% could strengthen the government's broader policy of lowering input costs.
- Implementation Risks: Faster ITC refunds have been promised, but delays in processing remain a bottleneck. Without process reforms, the liquidity benefits may not fully reach manufacturers.
Still, the reforms represent a significant correction, easing cost pressures, boosting liquidity, and improving India's competitiveness against imports, while advancing the government's larger vision of fertiliser self-sufficiency by 2032.
RENEWABLE ENERGY SECTOR
India's renewable energy sector is on a transformative path, with 2024 marking a year of record capacity additions and significant policy advancements.2
As part of the reforms announced in the 56th GST Council meeting, the GST rate on renewable energy devices and parts used in their manufacture, which were previously taxed at 12%, has now been reduced to 5%. This measure has been introduced to lower the cost of renewable energy equipment, thereby encouraging wider adoption of clean energy solutions. It also supports India's ambitious renewable capacity expansion targets under its climate commitments.
Addressing inverted duty in renewables
A pertinent question that arises is whether this reduction will exacerbate the problem of inverted duty structure, since these goods already faced such a challenge. To which the GST Council answered that by lowering the output tax rate to 5% while inputs continue to attract higher rates, the inversion does, in fact, deepen. However, the GST framework provides a mechanism for refund of accumulated ITC arising out of inverted duty structures. Additionally, the Council has emphasized that process reforms are being introduced to ensure that refunds are processed in a timely and efficient manner, thereby mitigating working capital blockages for businesses in the renewable energy sector.3
Remaining challenge
It is crucial to highlight that one issue still remains unsolved in renewable energy sector i.e., applicability of Entry 201A in cases where components are provided free of cost by the recipient.
Entry No. 201A of Schedule I of Notification No. 1/2017-Central Tax (Rate) dated 28.06.2017 (as amended), renewable energy devices and parts for their manufacture attract 12% GST. Further, it provides a specific valuation mechanism, stating that 70% of the gross value of the contract shall be deemed as goods and taxed at 12%, while 30% shall be considered as service and taxed at 18%, in cases where both goods and services are supplied.
However, complications arise when not all components of the solar generating system are supplied by the contractor. In many cases, project owners provide certain parts themselves (such as inverters, transformers, modules, etc.) and provide them on free of cost basis to the EPC contractor. This breaks the 'composite supply' structure and questions emerge regarding the classification and GST rate applicable to such supplies.
The current GST framework lacks clarity when it comes to the tax rate on solar power generating systems where components are provided free of cost by the project owner. This has led to refund denials and reclassification of supply, which ultimately affects project economics and investor confidence. A proactive step by the authorities in issuing a clarification and a coordinated push by the industry in seeking such guidance is imperative for resolving this pressing issue.
Towards GST 2.0
Taken together, the fertiliser and renewable energy reforms mark the beginning of 'GST 2.0'- a phase that goes beyond revenue collection to structural correction and growth enablement.
- For agriculture, it eases costs, boosts domestic competitiveness, and advances food security goals.
- For renewables, it reduces barriers to clean energy adoption, supporting the transition to a low-carbon economy.
At the same time, pending concerns, subsidy-linked ITC blockage, uneven rate rationalisation (e.g., pesticides), and refund delays require continued policy attention.
Overall, the 56th GST Council meeting is thus a watershed moment, it reaffirms the government's commitment to rationalizing taxes, correcting long-standing distortions, and aligning GST policy with India's strategic priorities of food security, energy security, and sustainability.
Footnotes
1. https://indbiz.gov.in/indian-fertiliser-industry-aims-for-self-sufficiency-by-2032/
2. https://www.pib.gov.in/FactsheetDetails.aspx?Id=149095
3. Frequently Asked Questions (FAQs) on the decisions of the 56th GST Council held in New Delhi
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