GST makes inroads into agriculture sector

A subtle change in the definition of an “agriculturist” in the draft Central GST Bill, currently under consideration of Parliament, has brought absentee landlords under the ambit of the goods and services tax (GST). 

Also, a farmer who is involved in sericulture — the rearing of silkworms — may be required to register for GST under the new indirect tax regime, following the tweak in the definition. The jury, though, is still out on whether bringing sericulture farming under the ambit of GST will increase the price tag of your favourite silk sari. 

The definition of an "agriculturist" according to section 2(8) of the draft Central GST (CGST) Bill has been amended to cover an individual or any Hindu Undivided Family cultivating land either through own labour or hired labour under individual or family supervision. The draft model GST Bill introduced last November referred to sn “agriculturist” as “any person” cultivating land. 

“The government intends to cover only the barebones or actual farmers under the definition of agriculturist,” said L Badri Narayanan, partner, Lakshmikumaran & Sridharan.

Tax experts say absentee landlords do not fall under the definition of agriculturists as they do not undertake cultivation on their own accord. They give their land for cultivation to other agriculturists who, in turn, pay rent by means of cash or a share in the crop. “Absentee landlords would therefore be liable to pay GST on rent received in cash or in kind as a share of crop,” said Dinesh Agrawal, executive director, Khaitan & Co. 

Agreed Satya Poddar, partner, EY India: “Rental from land leased for agriculture could be taxable under GST in whatever form it is received, provided it is not exempted under subsequent rules.”  

Schedule II of the draft CGST Bill lists lease, tenancy, easement and licence to occupy land as supply of service. Experts say in case of absentee landlords, providing land for cultivation would be construed as supply of service under the GST regime. However this would be subject to the absentee landlord crossing the Rs 20 lakh annual turnover threshold for GST registration, pointed out Narayanan of Lakshmikumaran & Sridharan. For north-eastern states, the threshold for GST registration is Rs 10 lakh.

Tax experts, like Poddar, feel keeping agriculture produce under the tax-exempt list does not bode for the farming community. The typical inputs for farmers, such as fertilisers, seeds, tractors are taxable under GST. However, as farming produce is largely exempt from GST, the farmer is not in a position to claim any input tax credit. “This could breed inefficiency,” Poddar said.  Most experts expect the government to exempt rental income from agriculture from GST in subsequent rules, given the widespread impact of this measure.

Agriculture experts point out the land lease model is a widely prevalent practice, accounting for more than half the land under cultivation. 

According to a study on agricultural land leasing by T Haque, head of NITI Aayog's land policy cell, about 57 per cent of leased area in the kharif season (sown in July and harvested from October) and 54 per cent in the rabi season (sown and harvested in October-March period) where operating under short-term leases. 

The narrowing down of the definition of an agriculturist in the draft CGST Bill means activities such as sericulture and grazing may not be treated as cultivation of land. “Thus a farmer who indulges in sericulture is required to take GST registration,” said Narayanan. This could have an impact on the price tag of silk products, depending on the rate charged, experts said.

Narayanan feels going forward the scope of the term “produce out of cultivation of land” might become a disputable issue. “Would it cover only the primary and direct produce or also things like ginned cotton or oil, if supplied by a farmer?” he asked.

Surely, the last word is still not out on how the new indirect tax regime will impact the agriculture sector.

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