GST Applicability on Agricultural Activities – Important Court Rulings Explained

1. Introduction

GST was introduced with the objective of creating a uniform indirect tax system. However, agriculture has always enjoyed a special position under Indian tax laws. While primary agricultural activities are largely exempt, disputes arise when agricultural produce undergoes processing, storage, transportation, or trading.

Several High Courts and Appellate Authorities have clarified the legal position through important judgments. This article explains the judicial approach towards GST applicability on agricultural activities.

2. Legal Framework Under GST

(A) Definition of Agricultural Produce

As per Notification No. 12/2017-Central Tax (Rate), agricultural produce means:

Produce out of cultivation of plants and rearing of life forms of animals (except horses) for food, fibre, fuel, raw material or similar products, on which either:

• No processing is done, or

• Such processing is done as is usually done by a cultivator which does not alter its essential characteristics.

This definition becomes crucial in litigation.

(B) Key Exemptions Relevant to Agriculture

1. Services relating to cultivation

2. Loading, unloading, packing, storage of agricultural produce

3. Transportation by GTA of agricultural produce

4. Warehousing services for agricultural produce

Disputes mainly arise when authorities argue that the product ceases to be agricultural produce due to processing.

3. Core Issues Before Courts

Courts have generally dealt with the following questions:

1. Whether processed goods still qualify as agricultural produce

2. Whether milling, cleaning, grading changes essential characteristics

3. Whether commission agents in mandis are liable to GST

4. Whether warehousing services remain exempt after minimal processing

4. Important Court Rulings

(1) Processing vs Essential Character Test

Courts have consistently held that:

If processing does not change the essential character of produce and is normally done by cultivators, exemption cannot be denied.

Example:
Cleaning, drying, grading, sorting – generally considered permissible processes.

However:
When processing results in a commercially distinct commodity, GST becomes applicable.

(2) Warehousing and Storage Services

Judicial view:

If goods qualify as agricultural produce at the time of storage, warehousing services remain exempt.

But if the product undergoes substantial processing before storage, exemption may not apply.

The key factor examined by courts is:
Whether the produce retains its original identity.

(3) Milling and Conversion Cases

In cases relating to rice milling:

Courts have examined whether paddy to rice conversion changes essential characteristics.

Judicial reasoning often focuses on:

• Whether such processing is normally done by cultivators

• Whether the final product is commercially distinct

Where milling is done as a commercial activity beyond primary agricultural operations, GST liability has been upheld.

(4) Commission Agents in Agricultural Mandis

Courts have observed:

If the agent facilitates sale of agricultural produce and acts as intermediary without altering goods, exemption may apply under specific entries.

However, liability depends on:

• Nature of service

• Contractual structure

• Whether service qualifies under exemption notification

5. Judicial Principles Emerging from Case Laws

From various rulings, the following principles emerge:

1. Strict interpretation of exemption notifications

2. Essential character test is decisive

3. Commercial transformation triggers GST

4. Burden of proof lies on taxpayer claiming exemption

5. Notification wording must be carefully examined

6. Practical Impact for Taxpayers

Here’s what this really means for businesses:

• Mere cleaning, grading, sorting usually does not attract GST

• Advanced processing converting produce into a new product will attract GST

• Warehousing exemption depends on nature of goods at storage stage

• Proper documentation is critical to defend exemption

Businesses dealing in agricultural commodities must:

• Maintain clear process flow records

• Retain proof that processing is minimal

• Carefully analyze exemption entries before billing

7. Conclusion

While agriculture enjoys broad protection under GST, exemptions are not blanket in nature. Courts have emphasized substance over form. The real test lies in whether the produce retains its essential agricultural character.

Taxpayers engaged in agri-processing, trading, warehousing, and allied services must carefully evaluate GST implications in light of judicial interpretations.

A case-specific legal review is advisable before claiming exemption.