The Telangana Authority of Advance Ruling (AAR) has said in two rulings that seeds are not “agricultural produce” and should attract goods and services tax (GST), a development that could create complications for the agriculture sector in the future.

In both the rulings, the AAR said that “seed” is treated separately from “grain”.

The law applicable to grain and seed will be different and therefore concessions applicable to grain produced by a cultivator will not be applicable to seed, said the rulings of February 11.

The AAR rulings, in the case of Ganga Kaveri Seeds and Narasimha Reddy & Sons, applied the
ejusdem generis principle, said tax experts.

Both the companies are supplying goods which are produced from cultivation of plants, the AAR ruled. It said the companies were engaged in the production and sale of agricultural seeds and in the process of production they outsourced certain services such as cleaning, drying, grading and packing to the job workers in relation to the production of seeds.

“The authorities have applied the principle of
ejusdem generis, that is general words should take colour of the specific words and accordingly,” said Harpreet Singh, partner, indirect taxes at KPMG in India. “These rulings held that raw material used in definition of agricultural produce is confined to food, fibre, etc., which can be consumed, and as seeds are not consumed but cultivated, the same are liable to GST.”

Agriculture is outside the gamut of tax framework in India for both direct and indirect tax. Tax experts said that seeds are exempt under the GST law and the agricultural produce from seeds or services in relation to agricultural produce are also exempt from GST.

Many experts pointed out that if services, in relation to production of seeds, are brought under the GST framework, then it could impact the cost of the entire agricultural chain.

This could end in an additional cost of 18% on end products, they said.

Under the GST framework, the tax is passed on in the chain ahead. This could mean that GST will eventually be passed on to the end customer.

In the definition of agricultural produce, ‘raw material’ is used which is a general term and is in the company of specific words such as food, fibre and fuel. These specific words indicate direct consumption by humans or in industry but not in cultivation, the AAR ruled in the case of Ganga Kaveri.

These specific words indicate direct consumption by humans or in industry but not in cultivation – supply of seed does not fall under the definition of agricultural produce as the seed does not fulfil the utilities prescribed therein. Storage of the seeds in the leased storage facility or godowns, loading, unloading and packing of seeds by the applicant-job worker on job work basis are not exempt from payment of GST, the AAR ruled in the case of Narasimha Reddy.

“In common parlance, one would tend to perceive seeds to be agricultural produce and hence not liable to GST,” said Singh.

While AARs are only applicable to the companies that have approached the bench, often they are taken as a precedent in the case law. In several instances in the past, the tax authorities started issuing notices following one AAR ruling.