Sugar: Unveil policies to promote ethanol as green fuel

Sugar sector has been buoyed up by high sugar prices and seeks policies to promote ethanol as green fuel in the ensuing Union Budget 2010-11.

The sugar prices have been remained firm on the back of fundamental tightness in sugar, which is expected to continue till December 2010. Sugar Season (SS) 2009-10 is expected to be the tightest global demand-supply year since 1960. At the end of Indian SS 2008-09, inventory stood at 2.5 million tonne (equivalent to 1.3 months of consumption as against the desired three months), a 10-year low, with a 44% drop in production to 14.7 million tonne.

Domestic sugar production in SS 2010 expected to be about 15 million tonne only and further the sugar production in SS 2011 is also not expected to improve enough to bridge the demand supply gap.

On the other side, consumption remains steady. So to bridge the demand-supply gap, India is likely to import at least 7-8 million tonne of raw/white sugar in SS 2009-10 — a historic high.

Further, in SS 2010-11, even if the sugar production in the country increases by 35% to 21-21.5 million tonne, yet, it would not be sufficient to cater to demand and the country would have to import at least four million tonne of sugar in SS 2010-11.

This has caused the domestic sugar production to jump up significantly and sugar prices are hovering at about Rs 40/kg after spiking up to Rs 44-45/kg in early January 2010. The international sugar prices also increased to historic level on the back of increased import from India along with import demand from other countries and drop in production in Brazil due to bad weather.

The spike international prices have restrained the domestic sugar producers from importing the raw sugar for processing here.

Industry expectations

The premier sugar body in the country Indian Sugar Mills Association (ISMA) has raised certain demands as expectations from Union Budget 2010-11. They are as follows:

Income Tax Exemption for Cogeneration Projects to increase by 5 years

Presently, Cogeneration Projects get the benefit of tax exemption for 10 years u/s 80-IA of the Income Tax Act. This benefit is available if power generation begins before 31st March 2010. This is a major incentive to boost power generation capacity in the country and the industry feels that there is a need to extend this facility by another 5 years i.e. upto 31st March 2015.

Further, the profit linked Tax Incentive presently available to the Power Generating Undertakings u/s 80-IA of the Income Tax Act, 1961, is proposed to be substituted with Investment linked Incentive under the Direct Tax Code.

The aforesaid shift in the basis of calculation of Tax Incentive will lead to inefficiencies in the system on the ground that entities having longer pay back period (due to inefficient and poor management of resources etc.) will get higher tax incentives as compared to highly profit making entities with the shorter pay back period.

Inclusion of Ethanol in Declared Goods

Industry expects Ethanol to be included in the bracket of the declared goods (under Section 14 of the Central Sales Tax Act 1956, which deals with the Goods of Special Importance in Inter State Trade and Commerce). That would result in uniform sales tax implied on Ethanol at 4% across the country.

Some state governments impose various levies including sales tax under their respective Trade Tax Acts. The Trade Tax rates/VAT rates vary from 4% to 12.5%. In addition, the exporting states levy an export pass fee and the importing states levy import pass fee. In some states it is levied in the form of Permit Fee. Multiplicity of taxes by the State Governments, cut across the objective of National Ethanol Doping Programme adopted and mandated by the Central Government.

Service Tax on Goods transport

Service Tax is levied on the sugar mills and paid by them on sugarcane transportation. No doubt the Service Tax paid as above qualifies for CENVAT credit. Nonetheless it entails enormous and avoidable paper work. While perishable goods (fruits and vegetables) enjoy exemption under Notification No.33/2004 dated 3.12.2004, the same is not extended to sugarcane transportation.

Therefore the industry association urges that as sugarcane is also an essential commodity and is perishable in nature, exemption from service tax should legitimately be extended to cover transport of sugarcane as well.

Need to Promote Ethanol as Bio-fuel

A reduction in special additional excise duty on ethanol blended petrol of Rs.0.30 per liter, which had been allowed vide Notification No.16 dated 1st March, 2003 was withdrawn on 29.2.2004 without any justifiable reason. The industry seeks the Government to at least re-introduce this concession of 30 paisa per liter in the surcharge on ethanol-doped petrol.

This concession is important to encourage the oil companies to lift ethanol for blending with petrol to take advantage of this concession. In fact it is high time that this concession of 30 paisa is raised to Re 1/- per liter, if the programme of ethanol blending with petrol is to be encouraged to its estimated potential.

Excise Duty on Ethanol

The sugarcane molasses is the only feedstock available to the distilleries producing ethanol in India. It was requested that the Central excise duty on molasses falling under sub-heading 1703.10 of the Central Excise Tariff Act, 1985 which is now being charged at Rs 750/- per M.T. should be brought down to atleast Rs.150/- per M.T., if not lower, to maintain the cost of production of ethanol as low as possible and to ensure maximizing production and supply of ethanol for admixture with petrol.

Weighted Deduction for Construction of Roads in Rural Areas, conservation of water and productivity improvement

Sugar factories are located in the rural areas and undertake rural development activities including construction of roads but are seriously constrained to limit such activities due to lack of resources. The Association is of the considered view that sugar factories that undertake construction of roads in rural areas should be allowed a weighted deduction of 150% of the cost incurred. It is also suggested that a suitable amount should be earmarked as subsidy for this purpose.

Further Considering the importance of conservation of water and productivity of land, the expenditure incurred on both these items should also be made eligible for weighted tax deduction.

Analysts' expectations

It has been the long demand of sugar industry for de-regulation and various expert committees have recommended deregulation of the sugar sector to ensure its study growth to meet the rising demand for sugar but the sugar industry still continues to be highly regulated.

In the current year, the Government has increased the levy proportion from 10% to 20% and imposed several regulatory measures; stock holding limits on bulk consumers, trade and fortnightly sales and dispatches of sugar contrary to the recommendations of the expert committees favouring deregulation of the sugar sector.  In contrast the duty free import of raw sugar / refined sugar has not only been exempted from levy obligation but also from stock holding limit on bulk consumers and monthly release etc.

As the sugar industry is witnessing an up cycle, the government may not give due consideration to the demands of the Industry. Rather the government is already focusing on curbing the rising sugar prices. So the government may come with some other policies, which would enable the government in checking the rise in sugar price considering the sensitivity of sugar prices to overall inflation index.

As the government has already shown its commitment towards green fuel and taken few initiatives in this regard like mandatory blending of ethanol with petrol, it can declare the ethanol as 'declared goods'. 

Companies to watch out for

Balrampur Chini, Shree Renuka Sugars and Bajaj Hindusthan

Outlook

With significantly higher sugar prices on Y-o-Y basis, the contribution of sugar companies for each kg of sugar is expected to continue to be higher. Though the overall cane cost would be higher in SS 2009-10, the rise in sugar prices is comparatively higher and would boost the margin of sugar companies.

Further, the contribution from sale of processed raw sugar, imported earlier, will enhance the profitability of companies. Thus, the results of sugar companies would be better in the year ending September 2010 compared with year ended September 2009.

Though there is concern that the Brazilian sugar production may be higher and will boost the sugar supply in global market resulting in softening of sugar prices from the current level but more clarity will emerge post May'10 only. And if the Brazilian production would not be significantly higher from last year, the sugar prices will rise again.

The expectation of higher brazil supply and direct intervention from Government recently has resulted in softening of domestic sugar prices in last one week and the sugar prices of medium grade sugar has come down to Rs 38,000 per tonne against 41,300 per tonne in starting of February 2010.