10% import duty on wheat to hit food companies

The government on Friday imposed a 10% custom duty on wheat imports. This move will impact major global sandwich, pizza, burger, confectionaries and baked food brands that source their wheat from overseas because of price arbitrage and to meet their stringent standards.

M S Mani, senior director – indirect tax – Deloitte India, said the import of wheat has been rising over the past few years due to the western dietary influence on Indians and the companies manufacturing these foods may start sourcing from India.

"There are big companies, who sell biscuits, breads, cake, pizza, sandwiches and other wheat food products, that buy wheat in bulk from abroad. They do it because of the price arbitrage that they get from importing wheat rather than sourcing it domestically. They may meet their requirement from India (after the levy of custom duty)," he said.

Wheat is generally imported in bulk as it cannot be shipped in small quantities. It usually comes in shiploads. Unlike other foods, which use containers and boxes, wheat is brought in the cargo hold of a ship. There are very few ports in the country where the ships with wheat can arrive and be unloaded by being sucked out with a vacuum machine.

In recent years, India is slowly becoming wheat-based economy from rice-based economy that it has traditionally been. This is mostly due to western influence on our diet as it is typically characterised by wheat and flour. Lately, wheat consumption has been growing at 20% year-on-year.

Mani said a 10% custom duty is very nominal to have a significant impact on importers but is big enough to send a signal to large scale importers to source it locally. "It is big enough to discourage importers and make them introspect and to look at the domestic market to meet their wheat requirement," he said.

The government had used a similar tactic for steel, helping domestic companies and making importers fall in line. Once the government is clear that the supply imbalance has been corrected, it usually withdraws the duty.

A statement issued by the finance ministry said the levy has been imposed till March 31, 2016 and would generate revenues of Rs 90 crore for the period that it is being imposed for.

Ranen Banerjee, leader, public finance, PricewaterhouseCoopers (PwC) India, said the revenue collection was too small compared to the government's custom duty projection of over Rs 2 lakh crore for the current fiscal.

He said the duty is also likely to give some relief to the government in terms of its procurement from farmers at minimum support price (MSP) if it succeeds to correct the demand and supply situation in the wheat market and push up market price above the MSP.

"Imposition of custom duty will suppress supply of imported wheat, which will improve the demand for domestic wheat and push its market price upwards. If it will go above the MSP (at which the Food Corporation of India procures from farmers if the market price is below it), it will lower the pressure on the government to procure wheat from farmers," he said.

Deloitte's Mani also said the purpose of the duty was to protect the farmers rather than earn income from it. "The intention is to protect the farmers, who suffer when there is unrestricted import of food grains. So, in a situation when there is sufficient food grain, the government selectively levies custom duty or raises it from period to period," he said.

Interestingly, wheat has been imported despite bumper domestic output in 2014-15 crop year and surplus stocks with the Food Corporation of India (FCI), which procures and distribution of food grains on behalf of the government.

Of the 28.08 million tonne of wheat procured in the current year, 26.62 million tonne was purchased under the relaxed quality norms because the crop got damaged due to unseasonal rains early this year.

The government wants to sell off this wheat stock on a priority basis through ration shops, welfare schemes and open market sales.

Wheat production in India, the world's second biggest grower, is reportedly estimated to have declined to 90.78 million tonne in 2014-15, as against the record production of 95.85 million tonne during 2013-14.

Still, the government has a huge stock of wheat at over 40 million tonne due to bumper procurement this year and carryover stock from the previous years.