In two rulings, the Telangana Authority of Advance Ruling (AAR) stated that seeds are not "agricultural produce" and should be subject to goods and services tax (GST), a development that could complicate agriculture sector in the future.
The AAR stated in both rulings that "seed" is treated separately from "grain." According to the February 11 rulings, the law applicable to grain and seed will be different, and thus concessions applicable to grain produced by a cultivator will not be applicable to seed.
According to tax experts, the AAR rulings in the cases of Ganga Kaveri Seeds and Narasimha Reddy & Sons applied the ejusdem generis principle.
The AAR ruled that both companies are supplying goods derived from plant cultivation. It stated that the companies were involved in the production and sale of agricultural seeds and that during the production process, certain services such as cleaning, drying, grading, and packing were outsourced to job workers in relation to the production of seeds.
"The authorities have used the principle of ejusdem generis, which means that general words should take on the colour of specific words," said Harpreet Singh, partner, indirect taxes at KPMG in India. "These rulings held that the raw material used in the definition of agricultural produce is limited to food, fibre, and other consumables and that because seeds are not consumed but cultivated, they are subject to GST."
Agriculture falls outside of India's tax framework, both directly and indirectly. According to tax experts, seeds are exempt from GST, as are agricultural products derived from seeds and services related to agricultural products.
Many experts have stated that bringing services related to seed production under the GST framework could have an impact on the cost of the entire agricultural chain. According to them, this could result in an 18% increase in the cost of end products. The tax is passed on in the chain ahead under the GST framework.
This could imply that GST will be passed on to the end-user. In the definition of agricultural produce, the term 'raw material' is used, which is a broad term that is used alongside specific words like food, fibre, and fuel. The AAR ruled in the case of Ganga Kaveri that these specific words indicate direct consumption by humans or in the industry but not cultivation.
These specific words indicate direct consumption by humans or industry but not cultivation – seed supply doesn’t fall under the definition of agricultural produce because the seed does not fulfill the utilities prescribed therein.
The AAR ruled in the case of Narasimha Reddy that storage of seeds in leased storage facilities or godowns, as well as loading, unloading, and packing of seeds by the applicant-job worker on a job work basis, are not exempt from GST payment. "In common parlance, one would tend to perceive seeds as agricultural produce and thus exempt from GST," Singh explained.
