In re Fair Trade Alliance Kerala (FTAK) (GST AAR Kerala)
1. Whether the applicant an association of farmers, engaged in supply of agricultural produce through concept of fair trade, is liable to pay GST on component of “Fair Trade Premium?
Ruling: Yes, The Fair Trade Premium forms part of the consideration and value of taxable supply of the goods supplied and the applicant is liable to pay GST on the same rate as the rate applicable to the respective goods supplied.
2. Whether the component of ‘Fair Trade Premium’ constitutes consideration or additional consideration for supply of goods made by the applicant.
Ruling: Yes, the Fair Trade Premium forms part of the consideration for the goods supplied.
3. Whether component of ‘Fair Trade Premium’ can be treated as an a gratia payment which is not liable for GST either as supply of goods or as supply of services.
Ruling: No, in view of the reasons stated above.
FULL TEXT OF THE ORDER OF AUTHORITY FOR ADVANCE RULING, KERALA
1. M/s Fair Trade Alliance Kerala (hereinafter referred to as ‘the applicant’), formed in 2006, is an association of over 4000 Small Holder Farmers in North Kerala.
2. At the outset, it is clarified that the provisions of the Central Goods and Services Tax Act, 2017 (hereinafter to as CGST Act) and the Kerala State Goods and Services Tax Act, 2017 (hereinafter referred to as KSGST Act) are the same except for certain provisions. Accordingly, a reference hereinafter to the provisions of the CGST Act, Rules and the notifications issued thereunder shall include a reference to the corresponding provisions of the KSGST Act, Rules and the notifications issued thereunder.
3. The applicant had requested an advance ruling on the following
3.1. Whether the applicant an association of farmers, engaged in supply of agricultural produce through concept of fair trade, is liable to pay GST on component of “Fair Trade Premium?
3.2. Whether the component of ‘Fair Trade Premium’ constitutes consideration or additional consideration for supply of goods made by the applicant?
3.3. Whether component of ‘Fair Trade Premium’ can be treated as an ex gratia payment which is not liable for GST either as supply of goods or as supply of services?
4. Contentions of the applicant:
4.1. The applicant submits that they focus on issues of sustainable farming and trade justice. The intention is to enable farmers to access the global and pan Indian markets and improve their income following principles of “Fair Trade”.
4.2. The applicant submits that Fair Trade is an organised social movement and market-based approach that aims to help producers in developing countries to obtain better trading conditions and promote sustainability. Generally, farmers and workers at the beginning of the chain do not always get a fair share of the benefits of trade. The system of Fair Trade ensures that the farmers who are at the beginning point of the supply chain are adequately compensated as being part of the Fair Trade community. The concept of Fair Trade has been in vogue as early as the 1970s but it assumed a structured and organised format governed by standards and certifications in the 1990s. Fair Trade operates mainly on the following ten principles; (1) Opportunities for disadvantaged producers; (2) transparency & accountability; (3) Fair Trade practices; (4) Fair payment: (5) No child labour, no forced labour; (6) No discrimination, gender equity, freedom of association; (7) Good working conditions; (8) Capacity building; (9) Promote fair trade; 10) Respect for the environment. These goals are achieved through the active contribution and participation of Fair Trade Enterprises involved in every limb of the production/supply chain. Fair Trade sets social, economic and environmental standards for both companies and the farmers and workers who grow the food. For farmers and workers, the st rds include protection of workers’ rights and the environment, for c y include the payment of the Fair Trade Minimum Price and an additional Fair Trade Premium to inyest in business or community projects of the community’s choice. The main regulatory bodies of Fair Trade across the world are Fairtrade International, WFTO [World Fair Trade Organisation], SPP Global [Symbol , of Small Producers], Fair For Life, Ecocert Fair Trade, etc. Fairtrade International has its own certification body, Flocert, while most other Fair Trade schemes use independent certification bodies who audit farmer’s organisations and businesses as per their schemes. Fair Trade Minimum Price [FTMP) is the minimum price that must be paid by buyers to producers for a product to become certified against the Fair Trade Standards. The FTMP is a floor price that covers producers’ average costs of production and allows them access to their product markets. The FTMP represents a formal safety net that protects producers from being forced to sell their products at too low a price when the market price is below the cost of sustainably producing a product. It is therefore the lowest possible price that the Fair Trade payer may pay to the producer. When the relevant market price for a product is higher than the Fair Trade minimum price, then at least the market price must be paid. Fair Trade Minimum price is fixed taking into account various factors as cost of production and, other overheads. The price arrived at through such a scientific method of analysing cost, expense and profit will most often be above the prevalent general market price. The Fair Trade Minimum Price fixed are reviewed periodically depending on changed agrarian and market situation. Fair Trade Premium is an extra sum of money received by the farmers and workers for their produce or labour in addition to the price of the commodity. The availability of this incentive to the farmer/worker community is one of the prominent features of the fair trade concept.
4.3. Products eligible for Fair Trade Premium: The Fair Trade premium is available in particular to export from developing countries to developed countries, most notably for coconut, cashew, spices, coffee, cocoa, sugar, tea, bananas, honey, cotton, wine, fresh fruit, nuts, handicrafts etc. The Fairtrade premium is calculated as a percentage of the volume of produce sold. The amount of premium, farmers receive differs from product to product and across regions. The price is reviewed every three to four years by the regulatory bodies to adjust to local inflation. The fair-trade premium is generally fixed on parameters as a certain fixed percentage of minimum fair trade price etc. The list of the fair trade price for the commodities coffee, cashew nuts and coconut for the period 2017-18, 2018-19 were also submitted by the applicant. The fair trade premium is not paid by any institution or organization but is a burden borne by the ultimate consumer. It is reflected in the higher market price they pay for the fair trade labelled product picked up from the shop shelves. The importer of Fair Trade products in the consuming country is the payer of the Fair Trade Premium and the exporter from the producing country is the conveyor of the FT premium to the Farmer’s / producers’ organisation. The percentage of such components is worked out as per the rates fixed by the relevant Fair Trade scheme. The amount paid as a fair trade premium by the ultimate consumer travels down the line of the supply chain and reaches the farmer/worker through an established system. The use of the Fairtrade premium is restricted to investment in the producer’s business, livelihood and community or the socio-economic development of the workers and their community. Its specific use is democratically decided by the producers through their democratically elected representatives.
4.4. The applicant submits that they are registered as a Society under the Societies Registration Act and has over 4,000 member farmers. The applicant was Fairtrade certified in 2006 for a wide range of products such as cocoa, coffee, cinnamon, cloves, ginger, nutmeg, mace, black and white pepper, cardamom, turmeric, cashew nuts, and coconuts. The applicant procures goods from the farmers at Fair Trade minimum price. Such prices are higher than the prevalent marketing prices.
4.5. The agricultural produce, after procurement, is sold to another company, which is also Fair Trade certified. Sample Copy of agreement between the applicant and the purchaser company, Sample copies of invoices of Fair Trade certified product sold to purchaser were submitted. The purchaser company is registered under GST. The purchaser company would export the goods either as such or after such processing as required. The exporter raises an invoice on the buyer abroad for a price that is inclusive of the premium at the percentage prescribed for each product. The foreign buyer would pay the invoice price. The price which is attributable as consideration for the supply is retained by the exporter. The component of a premium is passed on to the Applicant. The premium, received by the applicant is allocated for purposes as is decided by the premium committee of the applicant. The premium committee consists of members who are elected representatives of farmers forming the society. Few instances of the project for which premium have been used during the previous years were submitted before the authority. Accordingly, a large part of the Fairtrade Premium is invested in converting farms to organic production so that farmers can benefit from higher prices and access quality conscious markets. It is also used to defer the organic certification costs of farmers. In another instance, the premium has been invested in solar-powered electric fencing to protect farms on the edge of forests from wild animals including elephants. The fences act as a benign deterrent to the wild animals straying into farmlands. This has been hailed as an innovative effort to manage man-animal’ conflict and the UK charity, “The Elephant Family” characterized the cashews sourced from FTAK as Elephant Friendly Nuts. Another instance pointed out is that the premium has been invested in a disaster management fund. It is very important, especially for the farmers on the hillsides. At monsoon time there are landslides that can wreak havoc. Government aid is often delayed and inadequate and the farmers need immediate assistance, especially when they are left homeless and their crops destroyed. Premium is also used to create a common infrastructure for the organisation and has been invested in the construction of office premises. Other purposes of premium include the flagship project of applicant known as Jaiva jeevadhara project, community drinking water schemes, interest-free loans for ancillary farm income activities, creation of indigenous seed banks and a host of activities that promate Bio-Diversity, Food Security and Gender Justice.
4.6. The applicant reproduced the sections and rules, which are relevant for the decision of the issue for which the application is filed. The component of ‘Fair Trade Premium’ is taxable only when the same constitute component of a supply is liable to be taxed. They placed reliance on Section 9 of the CGST Act and Section 5 of the IGST Act.
4.7. Scope of Supply: Section 7 of CGST Act, provides that scope of supply includes all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal. The scope of supply also mandates fulfilment of the following parameters to attract the levy of GST;
