ABSTRACT
The agriculture sector is a very significant sector in the growth of the Indian economy. India is amongst the largest producer and exporter of agricultural products such as wheat, rice, sugarcane, and spices in the world. The agricultural sector is also one of the major sectors for employment in rural India. Since, the independence of India, there was no unified tax system in India. The introduction of Goods and Services Tax (GST) in 2017 had a huge impact on all sectors in the Indian economy including agriculture. The GST has been considered as one of the most significant reforms in the Indian tax system since independence. The GST aims to create a single national market in India. It is applied upholding the idea of “One Nation, One Tax”. Since, agriculture is the largest sector for employment, the implementation of GST has an impact on farmer’s income, agro-products, machinery, fertilizers, and exports. As a result, this may lead to drastic changes in our economy.
Keywords
Goods and Services Tax, Indian economy, Agriculture Sector, Gross Domestic Product, Indirect Tax, national market.
INTRODUCTION
“Taxes are the lifeblood of government and no taxpayer should be permitted to escape the payment of his just share of the burden of contributing thereto.”
:-Arthur Vanderbilt
A country’s tax system is critical in propelling the country along the path of effective development. If a proper tax structure is introduced, it leads to economic growth, which eventually leads to the country’s Gross Domestic Product (GDP) growth. The revenue generated by tax collection is the most important source of income for any country. Taxation is also the most significant source of revenue for the government in India.
It is undeniable that taxation has existed from the beginning of time. Manu smriti addresses tax collection activities at those times. In his book Arthashastra, Chanakya discusses the principle of taxation. In his novel, Chanakya refers to taxes as “Kosh Moolo Dand,” which translates as “revenue is the backbone of administration” (Prajapati 2014). However, when the East India Company began governing in India, there may have been significant improvements in the taxation system.
Under the British occupation, the taxation system was in disarray. Only after independence was the taxation system greatly streamlined, and some kind of relaxation in tax levy was implemented.
The taxation system in India has been categorised under two heads, namely, direct tax and indirect tax. As regards Indirect Tax, we have a very complex tax structure. The indirect tax includes the following: VAT (value-added tax), service tax, sales tax, excise duty, customs duty, and local taxes. There existed a dual levy of indirect taxes by the Union and also by the State Government. Income tax, service tax, customs duty, and central excise are those which were levied by the Centre. State excise, stamp duty, value-added tax, and land revenue were levied by the States. The mechanism of imposing taxes, abatements, exemptions other benefits is different in different states. Therefore, the need for a simple taxation system that would comply with the Indian socio-economic environment and which can describe the tax mechanism as simple as possible was urgently felt. These urges lead to the implementation of Goods and Services Tax (GST) in India.
The introduction of GST is a result of one of the various important reformative measures taken by the government to curtail corruption and improve economic growth in India. The GST was introduced with the aim of removing the prevailing defects of indirect tax laws in India. The GST is applied at a national level for the primary purpose of achieving the overall economic development of the nation. GST is levied on goods and services in order to collect revenue for the government so that the government can perform its administrative functions effectively. After a lot of tussles, the GST was brought into effect from 1st July 2017. It was termed as One Nation One Tax. Most of the Central and State level indirect taxes has been since subsumed under the new system of GST. The GST is a unifier that has integrated various taxes of the Centre and the State and has provided a platform for the economic union of the nation. There has been a paradigm shift in the structure and functioning of Indirect Taxes in India. Thus, GST is an indirect tax that is levied on the final consumption of goods and services and it only attracts the term “Supply” of goods and services. And if there is no supply of goods/services then there is an absence of GST (Pathan 2017).
GOODS AND SERVICES TAX (GST)
According to Article 366 (12A) of the Indian Constitution, a Goods and Services Tax is any tax on the sale of goods or services or both, excluding taxes on the production of alcoholic beverages for human consumption. Article 366 (12) defines goods as “all products, commodities, and articles.” Article 366 (26A) defines services as “something other than commodities.” As a result, the Goods and Services Tax (GST) is a tax levied on all goods and services. The levy, however, does not apply to alcoholic beverages intended for human consumption.
The Goods and Services Tax (GST) is essentially a common tax on both the supply of goods and the production of services. GST combines 17 distinct forms of central indirect taxes (service tax, excise duty, countervailing duty, and so on) and state indirect taxes (luxury tax, entry tax, VAT, octroi, and so on) to create a single consolidated Indian economy. GST seems to be a more dependable, straightforward, comprehensive, harmonised, and development-oriented tax structure. Unlike the previous tax scheme, the GST requires suppliers at each point of the supply chain to exclude taxes collected at previous amounts. It is primarily a value-added tax at each point. Thus, the purchaser of goods/services pays only the tax levied by the last supplier in the supply chain, with set-off incentives at all previous times.
In India, four GST thresholds, namely 5%, 12%, 18%, and 28%, have been implemented. Furthermore, certain products and services are excluded. The rates for precious metals and subsidised housing are an exception to the ‘four-tax slab-rule,’ and have been set at 3% and 1%, respectively. Furthermore, unworked diamonds, precious metals, and so on are taxed at a rate of 0.25 percent. To compensate states for any revenue loss due to the introduction of GST, a cess above the peak rate of 28 percent is levied on some prescribed luxury and demerit goods such as tobacco and tobacco products, pan masala, aerated water, and motor vehicles.[2]
THE EFFECT OF GST ON THE AGRICULTURAL SECTOR
The agricultural sector is the backbone of our country’s economy. The agriculture sector contributes significantly to the country’s production. In reality, India is the world’s second-largest producer of agricultural products. It accounts for approximately 16% of Indian GDP.[3] India transfers a huge quantity of agricultural products like vegetables, fruits, tea, spices, pulses, etc. This benefits the government to a large extent. In 2018-2019, the agricultural sector has contributed approximately 18 percent to the GDP of our country.
One of the major problems in the agricultural sector is that the farmers are unable to get the actual value for their agricultural products. Also, the most challenging issue faced by the agricultural sector is the transportation of agricultural products beyond the state boundaries throughout India. GST has somewhat resolved the issue of transportation. Presently, there is no GST payable on the transportation of agricultural produce. GST is on the verge of providing India with its first National Market for agricultural goods. Prior to the implementation of GST, when trades took place interstate, the crops were subject to various kinds of taxes. Also, it was a necessity to obtain a license from each of the states where trade was carried on. This stood as a major drawback in the trading of farming products between states. However, after the implementation of GST markets were liberalised for agricultural products.
The various GST legislations promote reliability, transparency, and improvement of the timeline in the supply chain. A better supply chain mechanism ensures a better cost for the farmers/retailers and also ensures a reduction in wastage. GST increases the transparency at each level of the supply chain of every product/service and makes the tax regime simpler. Under the GST legislation, small-scale agriculture has been made non-taxable and most of the basic agricultural products which are sold fresh do not have any GST. However, GST compliance and GST registration have been made mandatory for large scale farmers and agricultural companies.
Dairy farming, poultry farming, and stock breeding are specially kept out of the definition of Agriculture; hence these are liable to be taxed under the GST regime. The mere cutting of wood or grass, gathering of fruit and raising of manmade forest or rearing of seedlings or plants have also been specifically kept out of the definition of Agriculture, therefore these are also liable to the GST.
A 12 % GST is imposed on butter and other fats (i.e., ghee, butter oil, etc.) and oils derived from milk; dairy spreads. Fertilizer which is an important element of agriculture was previously taxed at 6 %. Under the new GST regime, the tax on fertilizers has been reduced to 5 %. A 12 % GST is levied on fertilizer grade phosphoric acid. GST rate of 18% is levied on pesticides. GST also helps in reducing the cost of heavy machinery used for producing agricultural commodities. A GST of 18 percent is levied on the manufacture of tractors. This is beneficial because the manufacturers are now able to claim the Input Tax Credit. The GST rate of 12 percent is applicable to items, like water pumps, milking machines, and self-unloading trailers and is used for agricultural purposes. Therefore, if an agriculturalist buys any of these products, he is liable to pay GST as these products attract GST.[4]
Agri-commodities like vegetables, fruits, milk, wheat, and rice are of 0 % tax. The tax on select milk products were taxed at 2 %VAT but under the GST regime the rate of fresh milk is nil and other products like condensed milk and skimmed milk are taxed at 18 percent and 5 percent respectively. Dry fruits, jellies, paste jam, and juices are charged with 12 percent and 18 percent. These rates are high compared to the 5 % tax earlier.
As the GST has been introduced with the objective of having a unified tax structure for goods and services, this is likely to facilitate and strengthen the Scheme on National Agricultural Market (NAM or eNAM) aimed at an integrated system of market of agriculture produce at the national level, allowing free flow of agricultural commodities cross states.[5] NAM or eNAM promotes uniformity in agriculture marketing by streamlining of procedures across the integrated markets, removing information asymmetry between buyers and sellers and promoting real time price discovery based on actual demand and supply.[6] It is a common e-commerce platform for impartial and transparent trade of agri-commodities. GST is, therefore, essential for creating a path for the successful implementation of NAM or eNAM. Further, the promotion of the NAM by the Central Government in accordance with the GST has created scope for increased transparency and impartial trade of agri-commodities.
POSITIVE IMPACT OF GST ON AGRICULTURAL SECTOR
The positive impact that GST have has on the agricultural sector have been discussed as follows:
1. Enhanced mechanism of the supply chain
Under the GST regime, the levy on the storage of farm products is excluded. This lowered the farmers’ tax burden. It has also given farmers a chance to market their products at the best price possible and minimised the inevitable food loss associated with storage.
2. Credit for Input Tax
For the tax already charged for each addition, GST provides each dealer with an Input Tax Credit (ITC). In this way a transparent, trouble-free supply chain will be created, which will enable agri-food to travel freely throughout the world.
3. Transport time reduced
Farm products can be destroyed and are also affected by the time they are transported. The introduction of GST should strengthen the farm market, as a single tax rate is now in place, making transportation of farm goods uncomfortable.
4. Tax exemption
GST is a levy levied on consumption. It is only collected if, according to the previously placed excess tax, agricultural items are marketed by manufacturers or on the produce of goods.
5. Ease intergovernmental trade
In the past, different taxes were levied on the intergovernmental trade of a single commodity. At each stage of their trade permissions and licences for various states, which caused true problems in exchanging goods, became essential. The introduction of GST has also liberalised agricultural commodity marketing and made it possible for agricultural commodities to operate smoothly.
NEGATIVE IMPACT OF GST ON AGRICULTURAL SECTOR
The negative impact of GST on the agricultural sector is as follows:
1. Doubling of the tax burden
Food products such as fish, meat, poultry, milk products, condensed milk, dried fruit, jellies and so on can increase in taxes relative to previous tax rates. As a result, the food sector’s workload has doubled.
2. Reverse charge
Most agribusinesses rent warehouses to small property owners. Such owners would probably stay unaccompanied suppliers. However, GST will be responsible for the leasing of warehouses by storage and storage agency at the reverse cost of 18 percent.
In the form of higher costs or storage of products, the tax burden is invariably passed to producers. The costs of farm products are expected to have a direct effect.
3. Increased storage or cold-storage building costs Previously, most facilities for Agri-storage infrastructure building and food grain handling systems were excluded from service tax. GST reduced the number of exemptions. Both factory building and cold storage are also subject to 18 percent GST for farm products. There cannot be an ITC in this regard, because the external availability of storage service is beyond the field of GST.[7]
4. Modern facilities
The imports of project machinery to store agricultural goods such as mechanned handling systems and pallet racking systems under the former indirect tax regime faced a 5% custom duty and were expressly excluded from duties. This exemption was not granted in accordance with GST. Imports of these commodities are currently 18% IGST. That leads to an increase in the cost of imported machinery, which deters modern agri-infrastructure development.
CONCLUSION
India had the most difficult fiscal system in the world before GST. There were also indirect taxes imposed by different jurisdictions. GST has subsumed nearly all indirect taxes and paved the way for a harmonised indirect tax system which makes India a business union.
The reason why GST is implemented in India is to reduce corporates and consumers’ tax burdens. The introduction of GST contributed to the unification of the Indian tax system and led to the creation of one national tax. This single tax also allowed many indirect taxes to be reorganised, including agricultural taxes. The agriculture field includes essentially perishable products and, as the supply chain of commodities becomes easier and the movement of goods quicker, it reduces food waste. Both growers and merchants profit from this. The GST has simplified interstate transportation of goods (particularly perishable food). The tax scheme has now been very transparent. A spike in the price of a few farm products was observed owing to a period of time of increase in the inflation rate. After GST introduction, some of the machines used in agriculture were still more expensive. In the long term, GST would support growers and distributors. Agricultural goods can be sold in the same tax scheme by farmers on various markets and in different states. In order to improve the agriculture industry, this single tax structure is crucial. Thus, it can be said that the GST has both positive and negative implications for the farming and agriculture sector in India.
[1] 4th year law student at Law college Dehradun , Dehradun .
[2] “GOODS AND SERVICES TAX”, Available at https://www.cbic.gov.in/resources//htdocscbec/gst/GSTConceptpercent20andpercent20Status01052019.pdf , Accessed 20 October 2020.
[3] “Distribution of gross domestic product (GDP) across economic sectors in India 2019”, Available at https://www.statista.com/statistics/271329/districution-of-gross-domesticproduct-gdp-across-economic-sectors-in-india/, Accessed 16 August 2020.
[4] “GST- Goods and Services Tax”, Available at https://www.cbic.gov.in/htdocs-cbec-gst/index-english, Accessed 16 August 2020.
[5] “GST: ITS IMPLICATIONS ON NATIONAL AGRICULTURAL MARKET”, Available at https://ccsniam.gov.in/images/pdfs/nam/Paper_Series
[6] “NATIONAL AGRICULTURE MARKET”, Available at https://enam.gov.in/web, Accessed 16 August 2020.
[7] Kaul Sanjay, “GST raises cost of agri warehousing and cold chains; amendments are need of the hour”, Available at https://www.thehindubusinessline.com/markets/commodities/gst-raises-costof-agri-warehousing-and-cold-chains-amendments-are-need-of-thehour/article9783988.ece#, Accessed 23 November, 2020.
Author Bio
A very good article. Thank You.