GST update No 118 on taxability of commission paid on sale of rice

India is an agriculture country and so the government has been allotting substantial portion of budgetary expenditure for development of agricultural sector and provide tax benefits to cultivators. The government had given certain exemptions vide Notification No. 12/2017 – Central Tax dated 28.06.2017 to certain sectors from levy of GST, agriculture sector being one of them. However, the assessee needs to pass the test of product being considered as “agricultural produce” in order to avail exemption in GST. Recently, one such issue was raised before the Karnataka AAR in case of M/s HINDUSTAN AGENCIES [ADVANCE RULING NO. KAR ADRG 73/2021 DATED 06.12.2021] wherein it was inquired as to whether the services provided in relation to selling of rice is liable to GST or not. The outcome of this decision is the subject matter of discussion of our present update. The applicant sought ruling on whether they are entitled to collect GST on supply of service which pertains to selling of agriculture produce as per APMC Act. The applicant submitted that he is a commission agent for rile millers and traders. As per the applicant’s contention, paddy and rice are both agriculture produce. The applicant believes that de husking or hulling of paddy would not alter the basic characteristics of the produce and is normally undertaken by cultivator to make it marketable for primary market. Reliance was place on Supreme Court’s decision in case of Ernakulam V.s Pio Food Packers wherein it was concluded that canned pineapple slices are to be treated as pineapple only. The applicant contended that the commission agency services for supply of rice to the rice millers will fall within clause (g) of SI. No. 54- Heading 9986 of Notification 12/2017- CT dated 28.06.2017 and is covered by exemption from levy of GST. The counsel of the department contended that rice cannot be considered as an agricultural produce and so it is not covered by the exemption notification. The respondent heavily relied on the definition of agriculture produce. In order to treat a product as agricultural produce, all of the following criteria must be fulfilled: a) The produce should be out of cultivation of plants and rearing of all life forms of animal. b) Further processing should not be done. And if any processing isdone, it is usually done by the producer or cultivator. c) The processing should not alter the very basic characteristic of the produce. d) The processing should render the product marketable. The revenue was of opinion that rice is obtained from paddy cultivation. Further, in addition to processing by cultivator, “milling” is done by millers which is normally not processed by cultivator or producer. Moreover, the essential character of paddy gets converted into rice as paddy can only be consumed after certain processing such as husking, steaming etc. Hence, it was pleaded that rice cannot be termed as agriculture produce. The AAR upheld the view of the revenue. The AAR also held that rice is an outcome of milling process carried out on paddy. The rice can be consumed directly, however, as far as paddy is concerned, it is subject to milling process. Further, milling process is not done by cultivators. Hence, it was concluded that rice is not an agriculture produce. The applicant is not assisting the cultivators of paddy instead he is assisting the manufactures of rice, millers and traders. Hence, it was concluded that the said activity carried out as a commission agent is not covered under exemption and hence, GST shall be levied on the same. It is worth mentioning that many of the disputes of erstwhile indirect tax regime are being inherited into GST era and one of them is the tussle of rice being considered as an agricultural produce. The dispute regarding rice being agricultural produce was prevalent in negative list regime wherein specific exemption was provided expressly stating that loading, unloading, packing, storage and warehousing of rice was exempt from levy of service tax. It was also clarified vide Circular no. 177/3/2014-S.T. dated 17.02.2014 that milling of paddy is an intermediate process in relation to agriculture and so job work of converting paddy into rice was also exempted from levy of service tax. It appears that the ripples of past litigation have occurred in the GST regime too. It is hoped that the above advance ruling is reversed by AAAR or a suitable clarification is issued by the CBIC for GST era too so that unwarranted disputes may be avoided.

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GST update No 118 on taxability of commission paid on sale of rice

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