27.10.2022: Cotton Seeds not eligible for exemption from GST payment on GTA services: Punjab AAR

The Punjab Authority of Advance Ruling (AAR) in the case of M/s Ahuja Industries vide Order No. AAR/GST/PB/02 dated 20.09.2022, has ruled that the 5% GST is chargeable on goods transport agency (GTA) services availed by the applicant for transporting cotton seed (Banaula) provided that the credit of input tax charged on goods and services used in supplying the service has not been taken, else 12% GST is applicable.

The AAR has observed that Cotton Seed (Banaula) is not eligible for exemption from payment of GST on GTA services. The applicant is in the business of receiving cotton seeds “Banaula” after being transported by GTA, which is classifiable with Chapter Heading 9965/9967 of the GST Tariff Act, 2017 and GST in respect of service is payable by the recipient under the reverse charge mechanism.

The question was whether Cotton Seeds “Banaula” were included in the list of agricultural products eligible for GTA service exemption under Notification No.12/2017 dated June 28, 2017.

The applicant submitted that as per the definition in para 2(d) of Notification No. 12/2017-Central Tax (Rates) dated 28.06.2017, “Agricultural produce” means any product arising from the cultivation of plants and the rearing of all life forms of animals. The term “agriculture produce” excludes the rearing of horses for food, fibre, fuel, raw materials, or other similar products, on which either no further processing is done or such processing is done as is usually done by a cultivator or producer, which does not alter its essential characteristics but makes it marketable for primary markets.

The applicant stated that the GTA services in relation to agricultural products are exempt under the GST Act vide Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017.

The department contended that the definition of agriculture produced under GST law is very restrictive in nature. It provides an exemption only to those products that are directly harvested from the farms or on which such processing is done by the cultivator to make it marketable, which does not change its basic characteristics. In the case of cotton seed, it is derived from the cotton plant, which consists of lint and seed, which together are known as “seed cotton”. Seed cotton is ginned for the extraction of fibre and cottonseed from it. So, in the process of ginning, cotton is first dried to remove moisture and then cleaned to remove any foreign particles. Further seed cotton is processed to remove the lint from the seeds. So, cotton seed is obtained from seed cotton by way of industrial processing called ginning, which debars it from the definition of agriculture products as per Notification No. 12/2017-Central Tax (Rate) dated 28.06.2017.

The AAR has held that cotton seed emerging from the intermediate process does not fall under the definition of “agricultural produce” under GST. It is apparent from the definition of “agricultural produce” that the government intends to provide exemption only to the product occurring at the first stage of cultivation or rearing and not to those which are processed in factories after they are sold by the cultivator or producer. 




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