In last budget speech by FM, has proposed Agri Infra Development Cess(AIDC) on certain goods. The cess has been introduced keeping in mind the immediate need to improve agriculture infrastructure. “There is an immediate need to improve agricultural infrastructure so that we produce more, while also conserving and processing agricultural output efficiently. This will ensure enhanced remuneration for our farmers. To earmark resources for this purpose, I propose an Agriculture Infrastructure and Development Cess (AIDC) on a small number of items,” Sitharaman said. The cess is expected to come in effect from February 2, 2021. According to the Budget for 2021-22, a Rs 2.5 per litre agri infra cess has been imposed on petrol and Rs 4 on diesel.
It origins in the Clause 115(1) of the Finance Bill,2021 has introduced Agriculture Infrastructure and Development Cess on the goods specified in the first schedule to Customs Tariff Act, 1975 on being imported into India. The AIDC has been imposed not only on the goods mentioned in the First Schedule to the Customs Tariff Act but as an additional duty of excise on the goods specified in Seventh Schedule to the Finance Bill. The Seventh Schedule contains two petroleum products namely motor spirit (Petrol) and HSD. As far concern the rate of levy, it has been clearly mentioned that the rate of AIDC shall be as specified in column (3) of the said schedule.
Increasing AIDC on various products by central government is seen as an encroachment on the legitimate right of the states , since it reduces the vertical transfer of resources. This is done by partially basic excise duty and additional excise duty in AIDC. In the proposed budget the Basic Custom duty on various products has been drastically reduced. With the proposed budgetary change of partial conversion on specified products into AIDC, the share of divisible pool in gross tax revenue in central govt is bound to shrink to about 70% which would be a concern to states. The states have demanded 50% share in the central tax revenues from the fifteenth finance commission but was retained as same proposed by fourteenth finance commission. This reduction is slap on states which are already constrained financially. Further,the Fifteenth Finance Commission regarding pegging the net borrowings of the states as 5% of the gross state domestic product (GSDP) in 2021–22 along with the allowance of an additional ceiling of 0.5% of GSDP subject to certain conditions. However, an analysis of net borrowings to GSDP ratio for 2019–20 of 12 major states shows that eight states already have this ratio at more than or equal to 2.5%
However, effectively, for consumers there will be no impact on selling price of the products on which Agriculture Infrastructure cess is levied. Ultimately with reduction in one levy(basic custom duty), another one is levied for the same amount (AIDC)), netting off the impact, with no gain no loss scenario. The tax component in the final price will remain the same for most of the products. It will only reduce the effective vertical transfer of shares to states.