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The Goods and Services Tax (GST) law have created several complexities by triggering large number of disputes between the taxpayers and the revenue. Various disputes relating to interpretation of the terms and provisions under the GST are arising. As a result, it is of utter significance that such issues are discussed comprehensively

One such current issue is levy of tax on inward freight for cotton seeds which is a matter of conflict between the Assessee and the Department. The dispute has arisen by virtue of Sl. No. 21 of the Notification 12/2017-Central Tax (Rate) dated 28.06.2017. In terms of this notification, transportation of agricultural produce by a Goods Transporting Agency (“GTA”) is exempt from tax.

Taxpayer’s dilemma

The Haryana Agriculture Produce Markets Act, 1961 (“1961 Act”), in terms of Section 23, empowers the market committee to levy market fees on purchase/sale of cotton seeds. Precisely, under the 1961 Act, cotton seed is treated as an agricultural produce because market fees is levied on an item if it is an agricultural produce. Accordingly, some traders have been treating cotton seed as an agricultural produce under the GST law. As result, they are not paying any tax on the freight element where cotton seeds are purchased by them.

However, the department seems to disagree with the above understating of the traders. At several instances, demand notices have been issued by the department calling upon several assesses to pay tax on the freight element at the time of purchase of cotton seeds. This has caused unrest among the traders who were considering such supply to be exempted under the afore-stated notification.

Analysing ‘agricultural produce’

In order to gain clarity on the issue, it is pertinent to analyse the definition of the term ‘agricultural produce’. The 1961 Act defines ‘agricultural produce’ as follows:

“Agricultural produce means all produce and commodities whether processed or unprocessed of agriculture, horticulture/apiculture, sericulture, animal husbandry, fleeces (raw wool) and skin of animals, forest produce [livestock, fisheries,] etc. as are specified in the Schedule or declared by the State Government, by notification in the Official Gazette, from time to time and also includes a mixture of more than two such products”

Further, the Schedule appended to the 1961 Act lists out several items, including cotton seed, which are to be considered as agricultural produce. However, it is to be noted that even the GST law defines the term ‘agricultural produce’. The notification 12/2017 – CT (Rate) defines the term ‘agricultural produce’ in the following manner:

“Agricultural produce means any produce out of cultivation of plants and rearing of all life forms of animals, except the rearing of horses, for food, fibre, fuel, raw material 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 market

It is crucial to understand that the scope of both the definitions of ‘agricultural produce’ is different. While the one provided in the 1961 Act lists out specific products, the definition falling under GST law is very narrow and restrictive. It mandates that any such produce which requires further processing, other than that by the producer/cultivator himself shall not render the product as ‘agricultural produce’. It flows from this definition that only those products which are the direct result of cultivation/rearing shall be considered as agricultural produce.

At times, the producers sell the produce as such without any further processing. The produce is sold to mill/plant owners who carry out necessary processes using machinery. It is this further processing of the produce which has been kept out of the purview of meaning of ‘agricultural produce’ under the GST law. It appears from the definition of agricultural produce that the government intended to provide exemption to the produce occurring only at the first stage of the cultivation or rearing and not to those which are processed in factories after they are sold. The case of cotton seed is such that it is obtained from raw cotton by way of industrial process called ginning. The process involves separating lint from the seed using machines. As a result, it is doubtful to say that cotton seed is an agricultural produce for the purposes of Notification 12/2017 – CT (Rate).

Way Forward

There have been several instances where a term appearing in multiple statutes is interpreted in different manner. It could be due to the object or reasons with which the concerned Act is brought into force. Thus, if cotton seed is treated as an agricultural produce under the 1961 Act but not under the GST law, it is due to the object and reasons with which both these enactments were effected. The term ‘agricultural produce’ under the GST law has been included to grant exemption to certain products and not considering whether market fees under the 1961 Act (or respective state enactment) on such product is applicable on not. It cannot be held absurd merely for the reason that both the legislations treat cotton seeds alike.

Until the definition of ‘agricultural produce’ falling under GST law itself is questioned, it cannot be contended that the ‘agricultural produce’ has to be interpreted as given under the Agricultural Produce Market Act  .Therefore, taxpayers have to understand the difference between both the definitions before treating ‘inward freight on cotton seeds’ as exempted under the GST law.

Rajat Gupta and Anil Gupta

[The authors are Advocate practicing in Hisar, Haryana. They may be reached at  The views expressed are strictly personal]


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June 2024