Are agricultural products exempt from GST?

Agriculture is a crucial sector in India, and the Goods and Services Tax (GST) has been designed to ensure minimal disruption to its operations. Most agricultural products and services are either exempt or taxed at a lower rate to promote the sector’s growth and reduce the burden on farmers.

Constitutional Framework

1. Article 246A

• Empowers both the Union and State legislatures to levy GST on the supply of goods and services, including agricultural products.

2. Article 265

• Ensures no tax is levied or collected except by the authority of law, providing a legal framework for GST applicability.

3. Article 366(12A)

• Defines GST as a tax on the supply of goods or services, encompassing agricultural products where applicable.

4. Article 246(3)

• Grants states the power to legislate on agriculture-related matters, ensuring alignment of GST with state agricultural policies.

5. Schedule VII (State List, Entry 14)

• Recognizes agriculture as a state subject, but GST overrides previous indirect taxes for agricultural trade and services under the Union-State GST framework.

6. Schedule III of the CGST Act, 2017

• Exempts certain activities like the sale of land, which could include agricultural land, from GST.

Provisions of GST on Agricultural Products

1. Exempted Products

Many agricultural products are exempt from GST to protect farmers and keep basic food items affordable. Examples include:

• Unprocessed goods: Grains, pulses, fruits, vegetables, raw milk, jaggery, and meat.
• Products supplied by farmers: Fresh flowers, raw cotton, and tendu leaves.

2. Taxable Products

• 5% GST:
  • Processed and branded food items such as cereals, flour, and rice (if sold under a registered brand name).
  • Raw wool and certain seeds (like vegetable seeds and oilseeds).
• 12% GST:
  • Processed meat, cheese, and frozen vegetables.
  • Sugar and animal feed supplements.
• 18% GST:
  • Agricultural machinery and irrigation equipment.

3. GST on Agricultural Services

• Exempt services:
  • Cultivation-related services like plowing, sowing, and harvesting.
  • Renting of agricultural land.
  • Warehousing of agricultural produce.
• Taxable services:
  • Services related to cold storage, agro-processing units, and testing of soil and water (18% GST).

4. Reverse Charge Mechanism (RCM)

• GST under RCM applies to certain purchases like raw cotton procured by registered buyers directly from unregistered farmers.

Impact of GST on Agriculture

1. Positive Impacts

1. Elimination of Cascading Taxes:
   • GST replaces multiple taxes (like VAT, excise, and service tax) with a single tax, reducing input costs for farmers.
2. Tax Credit for Inputs:
   • Farmers and agro-industries can claim Input Tax Credit (ITC) on machinery, seeds, and fertilizers, reducing costs.
3. Transparency and Uniformity:
   • A uniform tax structure improves the agricultural supply chain.

2. Challenges

1. Taxation on Processed Foods:
   • Processed and branded food products attract GST, potentially increasing costs for consumers.
2. Compliance Burden:
   • Farmers engaged in taxable services or selling branded products need to register for GST if turnover exceeds the threshold.
3. Reverse Charge Mechanism:
   • Traders procuring raw cotton and other materials must comply with RCM provisions, adding administrative complexity.

Landmark Cases Related to GST and Agriculture

1. M/s Adani Wilmar Limited v. Commissioner of GST (2020)

• Issue: GST applicability on branded and unbranded food grains.
• Judgment: The Gujarat High Court clarified that unbranded food grains are exempt, while branded products are taxable at 5%.

2. M/s Shivshakti Gold Finger Pvt. Ltd. v. Commissioner of GST (2021)

• Issue: Applicability of GST on cold storage services for agricultural produce.
• Judgment: Tribunal ruled that cold storage services for unprocessed agricultural produce are exempt, but value-added services attract GST.

3. Commissioner of GST v. M/s J K Agro Processors (2019)

• Issue: GST on agro-processing services.
• Judgment: The tribunal held that processing services like cleaning, grading, and sorting attract GST at 18%.

4. Union of India v. M/s Agro Food Products (2022)

• Issue: GST refunds for exporters of agricultural produce.
• Judgment: The Delhi High Court ruled in favor of exporters, ensuring timely ITC refunds for agricultural export-related inputs.

5. Farmer Producer Organizations v. GST Council (2021)

• Issue: Exemption for farmer producer organizations (FPOs).
• Judgment: The court upheld that FPOs engaged in the direct sale of agricultural produce are exempt from GST.

Compliance for Farmers and Agro-Traders

1. GST Registration:
   • Farmers or traders with a turnover exceeding ₹20 lakh (₹10 lakh for special category states) must register.
2. ITC Claims:
   • ITC can be claimed for machinery, equipment, and fertilizers used in agricultural operations.
3. E-Way Bill:
   • Required for transporting taxable goods over certain thresholds, ensuring compliance in logistics.

Conclusion

Under the CGST Act, 2017, agricultural products and services enjoy extensive exemptions, ensuring minimal burden on farmers while promoting sectoral growth. Constitutional provisions like Article 246A and Schedule III safeguard the sector’s interests. Landmark cases such as M/s Adani Wilmar Limited and M/s Shivshakti Gold Finger have clarified ambiguities, ensuring smooth GST implementation. While the system poses compliance challenges, its long-term benefits in terms of transparency and tax efficiency outweigh the drawbacks.