Introduction
India’s fertilizer and pesticide trade is a key part of agriculture, serving mainly farmers. The business is both seasonal and credit-driven, which presents unique GST compliance issues. This article summarizes GST impacts for this sector, covering delayed payments, input tax credit reversal, goods returns, and taxation on interest from farmers.
Distinctive Aspects of the Fertilizer and Pesticide Industry
The fertilizer and pesticide sector demonstrates several notable characteristics:
Exclusive farmer end-users: The customer base consists solely of cultivators, without any B2C variation.
Seasonal business cycles: Transaction volumes peak during sowing periods, with significantly reduced activity during off-seasons.
Credit-based transactions: Purchases are commonly made on credit, with farmers typically settling their accounts post-harvest. This practice extends through the supply chain, as retailers defer payments to wholesalers, who then postpone payments to manufacturers.
Frequent stock returns: Unsold inventory is regularly returned along the supply chain, progressing from retailers to wholesalers and subsequently to manufacturers.
Given these distinct characteristics, let us examine several aspects concerning the impact of GST on this sector.
1. ITC Reversal on Delayed Payments – Rule 37
Legal Position:
As per Rule 37 of the CGST Rules, 2017, if the recipient fails to pay the supplier (value + GST) within 180 days from the date of invoice, the input tax credit (ITC) claimed must be reversed, and interest at 18% must be paid from the date of issuance of invoice till the date of reversal.
Illustration:
- Invoice Date: 01-Jan-2024
- Invoice Value: ₹1,00,000 + ₹18,000 GST (18%)
- Payment Due Date: By 29/30-Jun-2024
- If unpaid by due date:
- ₹18,000 ITC to be reversed.
- Interest at 18% p.a. from 01-Jan-2024 till reversal date.
- Once payment is actually made, ITC can be reclaimed.
Note: In case of partial payment, only the unpaid portion’s corresponding ITC needs to be reversed proportionately, along with interest.
2. Treatment of Returned Goods – Credit Note vs Invoice
Issue:
In practice, when a retailer returns goods to the wholesaler, a debit note is often issued by the retailer, particularly in small towns, due to lack of awareness. However, this method does not align with GST law . In terms of Section 34 of the CGST Act, 2017, the credit notes can be isssued by the supplier in case of sales return by the recipient.
Correct Procedure:
- The original supplier (wholesaler) must issue a credit note to the retailer.
- The credit note amount can be adjusted against future tax liability in GSTR-1, subject to conditions.
Conditions under Section 34 of CGST Act:
i. Retailer must reverse ITC on the returned goods.
ii The adjustment via credit note must be declared by November 30 of the subsequent financial year in which the original invoice was issued.
Example:
- Invoice issued on: 01-Jan-2024
- Credit note must be reported latest by: 30-Nov-2025
Alternate Option – Retailer issues tax invoice
- Retailer can treat the return as an outward supply and issue a fresh tax invoice to the wholesaler.
- Retailer charges applicable GST, discloses the supply in GSTR-1, and pays tax.
- Wholesaler claims ITC on this new invoice.
Applicability: The same options and conditions apply when wholesalers return stock to manufacturers.
3. GST on Interest Collected for Late Payment – Section 15(2)(d)
Many retailers charge interest from farmers when payment is delayed. As per Section 15(2)(d) of the CGST Act, any interest, late fee, or penalty charged for delayed consideration forms part of the taxable value.
Implication:
- If the original goods attract 5% GST, then the interest component must also be taxed at 5%.
- This rule applies across the chain — whether it’s a retailer, wholesaler, or manufacturer recovering delayed payment.
4. Practical Tips for Dealers
- Maintain accurate books of accounts including payment timelines and stock returns.
- Review ITC aging reports monthly to check for 180-day breaches. Irrespective of the credit limit given by the supplier, try to pay the entire amount to the supplier to avoid further complications.
- Avoid issuance of debit notes by buyers — supplier must issue credit notes.
- Wholesalers should educate rural and semi-urban retailers on GST compliance to avoid cascading errors in the supply chain.
Conclusion
Fertilizer and pesticide dealers — both at wholesale and retail levels — must stay vigilant with GST compliance, especially given the credit cycles, stock return mechanisms, and seasonal nature of the trade. Ignorance of Rule 37, improper treatment of credit notes, or failure to tax interest amounts could lead to substantial tax reversals and penalties.
****
Disclaimer: The author is a Superintendent in Central Taxes. The views expressed in this article are strictly personal.
Author Bio
In respect of invoice issued on 01.01.2024, the credit note should be adjusted by 30.11.2024, it is inadvertently mentioned as 30.11.2025- Rambabu Gondala