How India’s latest tax overhaul shifts incentives from consumer comfort to farm resilience

When the Goods and Services Tax (GST) Council announced its most sweeping restructuring since the tax was launched in 2017, most headlines fixated on consumer-facing changes: the trimming of slabs, the fall in prices for daily essentials, the simplification into a two-rate structure. Yet tucked inside the fine print of September 2025’s decisions lies a story that could alter the economics of Indian agriculture more profoundly than the average consumer basket.

Tractors, farm machinery, irrigation hardware, fertiliser inputs, and select bio-pesticides have been shifted decisively into the lowest GST bracket of 5 per cent. Chemical pesticides, by contrast, remain at 18 per cent. Fertiliser intermediates that once created inverted duty structures—forcing manufacturers to live with blocked credits—have been rationalised. The long-awaited Goods and Services Tax Appellate Tribunal (GSTAT) has been operationalised, promising to unclog disputes that have tied up the working capital of hundreds of input MSMEs.

“GST reform is a landmark event in encouraging businesses. For businesses, especially the ones engaged in healthcare services and manufacturing, the reform creates an affordability-demand-innovation cycle. Eased taxes also place smaller businesses in a better position to expand, invest, and employ. This reform will not only empower individuals to take charge of their own wellness but will also fuel the growth of businesses that serve them, thus creating a powerful synergy between health and economic progress “

—- Sanjaya Mariwala, Executive Chairman and Managing Director of OmniActive Health Technologies

The Union government estimates the revenue hit from the overall rate cuts at Rs 48,000 crore annually. But for agriculture, the implications extend far beyond fiscal arithmetic. These changes will reset the cost of capital equipment, shape the adoption curve of sustainable inputs, and redefine how policy nudges can shift farming practices without overt subsidy. In short, GST 2.0 is less about consumer inflation optics and more about sending a deliberate price signal to the farm gate.

The Two-Rate Reset: Agriculture at the Core

The Council’s latest GST rejig has been pitched as an exercise in simplification, with three clear slabs: 5 percent, 18 percent, and a punitive 40 percent for luxury indulgences. Yet its most immediate and structural impact will be felt in agriculture. Tractors—excluding their highway-guzzling cousins—now move from the 12 per cent slab to 5 percent, freeing up capital at the farm gate and nudging mechanisation deeper into the hinterland.

Irrigation too has been a beneficiary. Drip and sprinkler systems, long taxed at 12 per cent, are now in the 5 per cent bracket. For a Rs 60,000 micro-irrigation kit, that means savings of nearly Rs 4,000—hardly trivial for a smallholder balancing the choice between water efficiency and the tyranny of tube-wells. In a country that houses 18 per cent of the world’s population but has just 4 per cent of its freshwater, this is more than fiscal fine-tuning; it is a nudge towards ecological prudence.

” The reduction in GST rates on key fertilizer raw materials such as Sulphuric Acid, Nitric Acid, and Ammonia has come at a much-needed time for the industry. For years, indigenous manufacturers, particularly MSMEs, struggled under the burden of a tax rate disparity 18 per cent GST on raw materials versus just 5 per cent on finished fertilizers. This imbalance created a severe working capital blockage. Compared to the earlier regime of 2 per cent CST or 5 per cent VAT, the straight 18 per cent GST on inputs hit small and medium manufacturers hard.

In effect, for every unit produced, 13 per cent tax accumulation got locked in the system, draining liquidity over time. Seeking refunds through the inverted duty structure involved heavy compliance costs, with consultancy and liaisoning expenses alone consuming 3–7 per cent of margins. This eroded competitiveness, while imports particularly from China gained an advantage in the Indian market “

— Rajib Chakraborty, National President, Soluble Fertiliser Industry Association

Equally significant is the bold distinction drawn between chemical and biological crop protection. Microbial and neem-based pesticides, now taxed at 5 per cent instead of 18, gain a decisive cost advantage. With India’s pesticide market valued at Rs 55,000 crore but bio-pesticides accounting for just 8 per cent, this 13-point wedge could accelerate adoption in residue-sensitive horticulture and export commodities.

Fertiliser producers, long shackled by an inverted duty structure, finally find relief as intermediates like sulphuric acid and ammonia are rationalised to 5 per cent, releasing trapped liquidity in a subsidy-dependent sector. Even dairy benefits modestly, with paneer and yoghurt cheaper—small price shifts that ripple across procurement, processing, and rural demand.

Mechanisation: The Flywheel Begins to Spin

India’s tractor market may be the world’s largest, but its penetration remains uneven. Small and marginal farmers, who constitute a staggering 85 per cent of holdings, often share or rent equipment, shackled by the daunting upfront costs and onerous EMIs.

“ We welcome the government’s decision to reduce GST on farm equipment, related components and tyres to 5 per cent. These GST reforms will accelerate mechanization by making tractors, harvesters, balers and implements more affordable, while lowering overall operating costs for farmers. This empowers industry players to address labour shortages, enhance farmer’s productivity, and promote sustainable practices.

For CNH, it provides the right environment to further localize, innovate, and expand our offerings, strengthening India’s role as a global CNH hub for farm machinery. As a leader in the harvesting and post harvesting segment, we see this reform as particularly timely ahead of the harvesting season, as lower costs will enable more farmers to adopt baling solutions, reducing crop residue burning and its impact on the environment ”

— Narinder Mittal, President & Managing Director, CNH India

The GST cut is therefore no marginal relief. A farmer financing a tractor over five years may see EMIs fall by Rs 800–1,000 a month—a sum that can determine whether a household survives the lean season or slides into debt. Unsurprisingly, analysts anticipate an 8–10 percent surge in tractor sales in FY26, contingent upon financing flows.

“Lowering GST on drones to 5 per cent is not a giveaway—it’s a growth multiplier. It reduces upfront prices for farmers and service providers, shortens payback on agri-drone operations, and helps India hit its aggressive growth trajectory for UAV adoption—CAGR ~24 per cent to 2030 with annual procurements rising from ~8,400 units in 2025 to ~16,800 by 2030 “

—- Dr. Preet Sandhuu, Founder & Managing Director, AVPL International

Yet the story does not end with tractors. The upgrade from 25–30 horsepower machines to 40–50 horsepower behemoths creates secondary demand for implements—planters, harvesters, multi-crop seeders. The Rs 25,000 crore agri-implement market, long constrained by affordability, now glimpses a flywheel of growth.

“We welcome this landmark move and believe that the reduction of GST to 5 per cent will empower drone-tech companies in multiple ways. For companies like Garuda Aerospace, which strongly believe that indigenous drones are the need of the hour, this reform provides the opportunity to deepen investments in R&D, foster innovation, and scale up manufacturing.

Lower costs also enable us to explore entry into new markets, encouraging and promoting the wider use of drones. This move directly improves the affordability of drones for farmers and allied sectors, further boosting the adoption of agri-drones across the country. It is also a step forward for initiatives like NaMo Drone Didi, which promote precision agriculture through drone usage. Moreover, it equips defence and surveillance sectors with cost-effective drone solutions for public safety, disaster management, and other critical applications “

— Agnishwar Jayaprakash, Founder, Garuda Aerospace

As of FY24, a staggering Rs 2.5 lakh crore of credits were marooned in disputes nationwide. Farmers may gain immediately, but manufacturers’ solvency hinges on the efficiency of GSTAT’s adjudication.

Irrigation: A Nudge Towards Resilience

If tractors represent raw power at the farm gate, irrigation epitomizes survival. The Central Ground Water Board warns that over 60 per cent of India’s blocks are already “critical” or “over-exploited.” Punjab may exhaust four-fifths of its aquifers by 2035.

Micro-irrigation, with its promise of 30–40 per cent water savings, has been hailed as panacea. Yet adoption languishes at 13 million hectares against a potential 70 million. Subsidies of 45–55 per cent under PMKSY exist but are mired in bureaucratic molasses.

By trimming GST from 12 to 5 per cent, the Council reduces upfront costs by around 7 per cent. Industry estimates suggest each percentage-point drop in effective cost can trigger 2–3 lakh hectares of incremental adoption annually. Should states align with timely subsidy disbursals, the needle on water efficiency could finally move.

Fertilisers: Fixing the Cash-Flow Conundrum

India consumes over 62 million tonnes of fertilisers annually, of which nearly 25 million tonnes are raw materials sourced from abroad. That import dependence is not just a statistic—it is the pivot on which India’s food security balances. Price stability in fertilisers has long been a political imperative.

The GST Council’s recent move to align the tax rate on fertiliser intermediates with that of finished goods at 5 per cent may seem technical, but it quietly dissolves a structural anomaly that has plagued the industry since the tax’s inception.

” The reduction by the GST Council in rates on critical agricultural inputs is a progressive change that will directly impact India’s marginal and small farmers. By cutting the GST on agri-drones, gibberellic acid, and a wide variety of bio-pesticides, such as Trichoderma, Pseudomonas fluorescens, and neem-based products, the government has reduced the input costs for the adoption of technology and sustainable and eco-friendly crop protection strategies significantly. This will encourage farmers to shift toward safer biological options, contributing to the improvement of soil health as well as long-term agricultural performance.

These measures address a longstanding concern within the industry and are in accordance with the vision of enhancing the competitiveness and environmental resilience of Indian agriculture. Simultaneously, there exists an opportunity for further rationalisation, particularly in sectors such as crop protection chemicals based on advanced chemistries, which work as an insurance for farmers against insect pests & diseases and a few raw materials that continue to be taxed at elevated slabs . “

— Dr. RG Agarwal, Chairman Emeritus, Dhanuka Agritech Limited

GST 2.0 rewires that equation. With intermediates and finished goods taxed on par, producers now have a cleaner ledger. Input credits are better aligned, refund claims should diminish, and compliance disputes can ease. For fertiliser manufacturers—many of whom run on thin margins and depend on timely subsidy reimbursements from the government—this alignment is more than a relief. It unclogs liquidity. It means procurement of imported raw materials can be smoother, letters of credit negotiated at better terms, and balance sheets freed from the opacity of pending tax credits.

“The government’s decision to reduce GST on key inputs – fertilisers and biopesticides – should be a big relief for farmers. With average input cost making up around 30 per cent to 40 per cent of total cultivation expenses for a farmer, the move comes at a time when agricultural crops have been adversely impacted due to erratic weather.

We believe that lowering the input costs will increase accessibility of quality crop protection solutions thereby aiding farmers to enhance their yield, boost income and stabilize the food supply. Additionally, the decision to reduce GST on dairy products to 5 per cent will improve affordability and boost consumption. This move would not only uplift dairy farming families but also address the country’s protein deficiency by enabling more households to access the nutrition they deserve.”

— Sunil Kataria, CEO & MD, Godrej Agrovet Limited

For farmers, the impact will be less visible but no less important. If manufacturers’ cash cycles run efficiently, price pass-throughs can be better managed. The spectre of sudden price spikes—common when import bills balloon after global disruptions like the Ukraine war, Middle Eastern supply squeezes, or Chinese export controls—can be mitigated. Stable input costs ripple through the chain: From fertiliser dealers to cooperative societies to the smallholder choosing whether to apply a full dose of DAP or cut back to save money.

Globally, the move signals India’s attempt to insulate itself from the volatile fertiliser geopolitics that dominate commodity markets. Russia and Belarus control significant potash reserves. Morocco and Saudi Arabia are dominant in phosphates. China swings between being a net exporter and a protectionist hoarder, depending on its domestic priorities. In such a world, India’s exposure to supply shocks is immense. Any fiscal mechanism that cushions volatility domestically is not only economically rational but also geopolitically prudent.

Dairy and Rural Demand: Modest Yet Meaningful

India’s dairy sector is already a global giant. Producing over 230 million tonnes of milk annually—close to one-fifth of global output—it stands as both a livelihood mainstay and a nutritional anchor. Yet sheer volume often disguises a structural limitation: Most of India’s milk still flows into the unorganised market, consumed as raw liquid milk or curd within households and villages. Only a quarter of this vast supply is processed into value-added products such as cheese, yoghurt, ghee, and infant nutrition. In Europe, that figure ranges between 60 and 70 per cent, reflecting the maturity of organised dairy processing and consumer acceptance of packaged nutrition.

The recent GST recalibration—lowering rates on certain value-added dairy products—may look modest on paper, but its significance lies in nudging the sector along a trajectory it has struggled to accelerate. A reduced tax incidence improves price competitiveness of packaged products vis-à-vis loose milk and informal alternatives. This matters in a country where even a Rs 2–3 difference can sway consumer preference in semi-urban and rural markets. Over time, the psychological barrier between “milk as a fresh staple” and “milk as a packaged product” begins to blur.

For cooperatives like Amul, Nandini, or Verka, which collectively channel millions of smallholders into formal supply chains, lower GST translates into stronger procurement cycles. If consumer demand shifts incrementally towards packaged dairy, cooperatives have a larger market to absorb member milk, stabilising farmgate prices even during flush seasons. The volume predictability strengthens the resilience of rural households whose monthly cash flow is tied directly to milk collection centres.

Private dairies, too, stand to benefit in ways less obvious but equally transformative. One of the persistent inefficiencies in India’s dairy sector is underutilised processing capacity. Plants often run below optimal levels due to fluctuating demand for packaged milk, skewed procurement in lean and flush seasons, and high consumer price sensitivity. A GST reduction, by making value-added products slightly more affordable, encourages demand elasticity. Even a small uptick in packaged curd or cheese sales can push plants closer to full capacity, improving economies of scale, lowering per-unit costs, and unlocking margins for reinvestment.

At the macroeconomic level, the move signals a recognition that India’s next phase of rural demand growth lies not in raw commodities but in value-added consumption. The dairy sector sits at the intersection of agriculture, nutrition, and rural employment. If value-added dairy can grow from 25 percent of output to even 40 percent in the next decade, it could catalyse billions in rural purchasing power, stimulate investment in cold chains and packaging, and create rural non-farm jobs in logistics, retail, and quality testing.

The Bottom Line

GST 2.0 is not merely fiscal tinkering; it is a recalibration of incentives at the farm gate. By lowering taxes on machinery, favouring biologicals, and smoothing fertiliser inputs, the state has wielded taxation not just to collect revenue but to engineer behavioural change. This is significant because Indian agricultural policy has historically leaned on the blunt instruments of subsidies, loan waivers, and procurement guarantees. Those mechanisms may offer temporary relief, but they rarely alter structural incentives. GST 2.0, by contrast, embeds nudges into the everyday arithmetic of farming decisions—whether to buy a tractor, adopt drip irrigation, or shift toward bio-based inputs.

“KRBL notes the GST Council’s decision to keep the tax rate on essential food items, including rice and edible oils, unchanged. This continuity provides stability, ensuring that staple foods remain affordable for households nationwide, while supporting both consumers and the broader economy.

At the same time, the reduction of GST on value-added food categories to 5 per cent is a progressive step that will encourage innovation in food, open opportunities for new product development, and strengthen India’s FMCG landscape. The overall rationalisation of rates will not only boost consumption but also play an important role in managing inflation.

For KRBL, with deep roots in farming communities and a growing presence in FMCG, this clarity and stability provide a strong foundation for innovation, investment, and sustainable export-led growth. As a leader in the rice industry, we remain committed to food security, accessibility, and contributing to India’s economic growth while supporting both farmers and consumers.”

— Ayush Gupta, Head – India Business, KRBL

Yet the measure of success will lie not in the intent but in the execution. India’s tax bureaucracy is notorious for delayed refunds, ambiguous classifications, and compliance bottlenecks that can suffocate small and medium enterprises. If the speed of refunds remains glacial, the clarity of classifications muddled, and the integrity of subsidy dovetailing weak, the promise of GST 2.0 could wither into yet another reform whose gains were lost in translation. Conversely, if these administrative levers are tightened, the farm sector could experience a liquidity release and investment push more powerful than any headline budget announcement.

The political economy is equally telling. For decades, agriculture has been treated as a sector to be placated rather than empowered—through free electricity, free water, or artificially low fertiliser prices. By using taxation to shape behaviour, the government signals a maturation of policy, shifting from populism to structuralism. It suggests that the Indian farmer is not merely a vote bank but an economic actor capable of responding rationally to price signals when those signals are transparent and consistent.

Globally, too, the move situates India differently. Most advanced agricultural economies—from the EU to the US—use a mix of direct payments and regulatory standards to push farmers toward sustainability and efficiency. India, constrained by fiscal space and the sheer scale of its farm population, has lacked that luxury. GST 2.0 offers a uniquely Indian route: Using tax differentials to make sustainable choices more affordable without imposing bans or mandates. If the experiment works, it may even serve as a template for other emerging economies wrestling with the same twin imperatives of competitiveness and ecological prudence.

The broader implication is that taxation, often viewed as a sterile exercise in revenue collection, is emerging as a tool of developmental statecraft. GST 2.0 demonstrates that fiscal policy can be as much about shaping future behaviour as about balancing present books. In agriculture—a sector that employs nearly half the country yet contributes barely a sixth of GDP—such behavioural engineering may hold the key to unlocking productivity without perpetuating dependence.

—- Suchetana Choudhury (suchetana.choudhuri@agrospectrumindia.com)