It is essential to consider GST 2.0 not merely as a tax relief package, but as a strategic policy change. Its economic role is in reducing the cost of farming, enhancing mechanisation, and competitiveness against imports.
By Naveen P Singh
The roll-out of the Goods and Services Tax (GST) on July 2017 was hailed as independent India’s most ambitious tax overhaul. Agriculture that supports close to half of the country’s labour force and contributes enormously to national food security was poised to benefit from a clean, transparent, and uniform tax regime. The assurance was of lesser cascading taxation, lower compliance barriers, and more equitable results for farmers.
Yet, the experience of the past eight years shows that distortions persisted. For instance, while seeds were exempt from GST, pesticides carried an 18 per cent rate. Fertilisers were taxed at five per cent, but tractors were subject to 12 per cent, while GST for their tyres and hydraulic pumps went as high as 18 per cent. These abnormalities not only caused confusion but also raised the cost of cultivation between 15 to 20 per cent, lost competitiveness, and deterred mechanization.
With the recent reform, so commonly referred to as GST 2.0, the Council has gone in for a full-scale rationalisation. The approach this time is holistic, rather than piece-meal tinkering. The package lowers tax on key inputs, incentivises sustainable agriculture, encourages mechanisation, increases food processing, and reduces logistics costs. More importantly, it marks a change of thinking: taxation is no longer perceived as a mere revenue-raising instrument, but as a tool to increase agricultural competitiveness and sustainability.
Mechanisation for the Common Man
Indian farm mechanisation has always been marked by paradox. While India is the world’s largest tractor market, mechanisation intensity is far below the world standard. The exorbitant prices of tractors, engines, tyres, and accessories, combined with an asymmetrical GST regime, put contemporary machinery beyond the affordability of marginal and small farmers.
GST 2.0 addresses these directly. The duty on tractors with engines of up to 1,800 cc has been lowered from 12 to 5 per cent, equating to a price cut of around ₹50,000 to ₹70,000 per tractor. Even the GST on tractor parts like tyres, tubes, and hydraulic pumps has been cut drastically from 18 per cent to 5 per cent, reducing maintenance expenditure. A similar cut, from 12 to 5 per cent, has been imposed on diesel engines of up to 15 horsepower, sprinklers, sets of drip irrigation, threshers, and composting devices.
These combined changes eliminate the asymmetry of the previous system and reduce mechanisation costs. The effect will be most pronounced for smallholders, who can now avail the use of machinery not only through outright purchase but also through custom hiring centres, cooperatives, and FPOs. Concurrently, the lowering of costs will lead to increased demand for rural credit and models of leasing, thus translating to the benefit of NBFCs and cooperative institutions and in turn, lessening labour drudgery and increasing productivity at the farm level.
Fertilisers and Bio-Inputs: Balancing the Equation
Pricing of fertiliser has remained economically as well as politically sensitive since it has a direct bearing on farm viability and food security. The sector was long under the shadow of an inverted duty structure in which raw materials like ammonia, sulphuric acid, and nitric acid levied 18 per cent GST while finished fertilisers carried only five per cent duty. This imbalance deterred domestic manufacturing and exerted upward pressure on prices.
In GST 2.0, the levy on these vital fertiliser intermediates has been cut from 18 per cent to 5 per cent, at long last balancing the equation. This will balance supply chains, lower the cost for manufacturers, and supply farmers with cheap and timely fertilizers at the time of sowing.
No less significant is the initiative of the government to incentivise sustainability through the budget. Bio-pesticides and micronutrients, previously taxed at 12 per cent, now find themselves at 5 per cent. This cut is expected to drive away excessive chemical use and promote green methodologies in keeping with the Natural Farming Mission. Accessible bio-inputs will simplify things for small organic growers and FPOs to go for climate-resilient farming, enhance soil health, and grow better-quality crops.
Dairy, Apiculture, and Allied Sectors: Pillars of Rural Livelihoods
Dairy is not just an industry but a lifeline for rural livelihoods, particularly for women and marginal farmers. The world’s largest milk producer, India, relies heavily on dairy to provide farm income supplements and nutrition security. GST 2.0 provides considerable relief to this industry by reducing the tax on butter and ghee to 5 per cent from 12 per cent. The duty on iron, steel, or aluminium milk cans has also been lowered to 5 per cent from 12 per cent, benefiting cooperatives and self-help groups that collect and distribute milk directly.
Apiculture, which supports thousands of beekeepers and tribal people, also benefits. The GST on natural honey has been lowered from 12 per cent to 5 per cent, and beekeeping is now more profitable. Likewise, the lowering of tax on prepared and preserved fish products from 12 to 5 per cent provides much-needed support to aquaculture and pisciculture, especially in coastal states. Even tendu leaves, which are a vital source of livelihood for Odisha, Chhattisgarh, and Madhya Pradesh tribals, are now taxed at a mere 5 per cent rather than the previous 18 per cent. Taken together, these steps strengthen agriculture’s allied industries as drivers of inclusive rural prosperity.
Food Processing: Unlocking the Value Chain
One of the weakest links in India’s agri-food system has been food processing. Despite producing vast quantities of fruits and vegetables, only 10 to 12 per cent of this output is processed, compared with 30 to 40 per cent in many East and Southeast Asian countries. High GST rates on processed products were a major deterrent for small and medium enterprises, as well as FPOs, that sought to enter this space.
GST 2.0 revolutionizes this sector by lowering the GST rates on prepared and preserved fruits, vegetables, and nuts from 12 to 5 per cent. This reduces entry barriers for entrepreneurs, promotes investment in supply chains and cold storage, as well as post-harvest loss savings that stand at up to 30 per cent for perishables. More significantly, it increases farmers’ participation in consumer prices and opens up prospects for value-added product exports. In the long term, it could make India a leading agri-food export base, similar to Thailand or Vietnam, and feed into the government’s vision of Atmanirbhar Bharat.
Expanding Horizons: Renewable Energy and Logistics Reform
Modern farming is also energy-hungry, and high energy prices frequently undercut farm profitability. This being understood, GST 2.0 cuts the duty on solar-run irrigation equipment from 12 to 5 per cent. By cutting the cost of switching to renewable energy, this step will reduce the cost of irrigation, lower reliance on subsidised power, and encourage climate-resilient agriculture.
Simultaneously, logistics reforms eliminate one of the unseen taxes on agriculture. Indian logistics cost 13 to 14 per cent of GDP, versus 8 to 9 per cent in advanced economies. Trucks that transport almost 70 per cent of farm freight were previously taxed at 28 per cent, driving up capital expenses for carriers. With the new regime, this has been lowered to 18 per cent, substantially reducing the initial cost of vehicles. In addition, the effective GST on third-party goods carriage insurance has been brought down from 12 to 5 per cent by allowing input tax credit. Together, these reforms will reduce freight charges, improve supply chain efficiency, and make Indian agricultural exports more competitive in international markets.
Beyond Tax Relief: A Strategic Policy Shift towards Viksit Bharat
It is essential to consider GST 2.0 not merely as a tax relief package, but as a strategic policy change. Its economic role is in reducing the cost of farming, enhancing mechanisation, and competitiveness against imports. Its social aspect is seen through the empowerment of women-run dairy businesses, tribal bee-keepers, and small aquaculture farmers. Environmentally, the reform advocates bio-inputs, water-saving irrigation, and renewable energy, all being essential to climate resilience. Institutionally, it enhances FPOs, cooperatives, and rural NBFCs through creating new opportunities in mechanisation finance and food processing.
Indian agriculture is at a turning point, under the double pressure of having to feed a rising population while being internationally competitive. GST 2.0, through rate rationalisation and elimination of long-standing distortions, has ushered in a growth-generating, inclusive, and sustainable tax regime. Its advantages permeate through the value chain — from farms to processing, from dairy to aquaculture, and logistics to exports.
The success of the reform, however, is contingent on complementary enablers like timely access to affordable credit, strong infrastructure, and good extension services. If these are properly aligned, GST 2.0 can become a potent driver for agricultural transformation, propelling India’s journey towards the national vision of Viksit Bharat 2047 — a prosperous, self-reliant, and globally competitive nation.
The author is Principal Scientist at ICAR-National Institute of Agricultural Economics & Policy Research (NIAP), Ministry of Agriculture & Farmers Welfare, New Delhi.
Views are personal.
Image: Wikimedia
