GST on Agarbatti: Applicability, GST Rate, HSN Code, ITC Availability

Agarbatti, also known as incense sticks, has been a part of Indian culture for centuries. It is a popular product that is used in both homes and businesses for both everyday use and religious rituals. However, with the implementation of the Goods and Services Tax (GST) system in India, the way agarbatti is taxed has changed.

Now, the tax rates for agarbatti have been standardised. In this article, we discuss the impact of GST on agarbatti in detail. Also, find out the HSN code and GST rate on agarbatti.

Applicability of GST on Agarbatti 

Under the GST law, GST is applicable to the manufacture and sale of agarbatti.

However, there are some exceptions to this rule, such as small-scale businesses with an annual turnover of up to Rs. 40 lakhs in a financial year (Rs.20 lakh in special category states and Telangana) do not need to get registered or pay GST. GST registration is mandatory if the turnover exceeds the threshold amount. 

There is a composition scheme available for small businesses. Under this scheme, businesses follow fewer compliances as well as pay taxes at a fixed rate on turnover. Eligible agarbatti manufacturers with an annual turnover of up to Rs.1.5 crore per annum (Rs.75 lakh for special category states and Himachal Pradesh) can opt into the composition scheme and pay GST at 1% on their turnover. This rate is significantly lower than the regular GST rate of 12%. However, businesses opting for the composition scheme cannot avail ITC and are not allowed to make interstate supplies.

Here are some more points that you should know about the taxation of GST on agarbatti:

Invoicing

Under GST, all GST-registered taxpayers are required to issue an invoice for all supplies of goods or services. The invoice should contain certain details such as the name, address, and GSTIN of the supplier and the recipient, the description of the goods, the quantity and value of the goods, and the amount charged.

In addition to these details, it is also important to mention the Harmonized System of Nomenclature (HSN) code – a four or six-digit code used to classify goods and services for taxation purposes – and the correct GST rate.

A taxpayer must ensure that all these details are accurately mentioned in the invoice to comply with the GST regulations and avoid any potential penalties.

Place of Supply

GST is a destination-based tax, which means that goods and services are taxed where they are consumed rather than where they are produced. This means that if you buy agarbatti from another state, the GST will be applied based on where the goods are delivered.

Transportation and e-Way Bills

Under the GST law, e-way bills are required for the movement of goods worth more than Rs. 50,000 (in a single Invoice/bill/delivery challan) within the state or across states. e-Way Bills help authorities keep track of the movement of goods and ensure that taxes are paid. Agarbatti manufacturers must ensure that e-way bills are generated whenever necessary to avoid any potential penalties.

GST Rate and HSN Code for Agarbatti 

The HSN code for agarbatti is 33074100, while the GST rate is 5%. Moreover, the GST rate on dhoop agarbatti is 5%.

ITC Availability on Agarbatti 

Input Tax Credit (ITC) is a credit given to businesses for GST paid on the purchase of goods or services used in their business operations. Agarbatti producers can claim ITC on the taxes paid for the raw materials used in the process, such as bamboo sticks, charcoal, and perfumes. However, certain conditions must be met in order to claim ITC, such as: 

• The inputs must be used for the purpose of business operations and not for personal use.
• The business must have a valid tax invoice or debit note issued by the supplier.
• The business must have received the goods or services for which they are claiming ITC. Meaning that the credit can only be claimed after receiving the final lot or instalment of goods.
• The business needs to pay the supplier within 180 days of the invoice date. Otherwise, the ITC claims will need to be reversed with interest. The ITC can be reclaimed once the payment is made.
• The supplier must have filed the tax invoice or debit note in Form GSTR-1, and the same must appear in the buyer's Form GSTR-2B.
• ITC on a tax invoice or debit note must be claimed within the time limit given by the GST provisions.
• No ITC is allowed if depreciation has been claimed on the tax component of capital goods.
• When a business uses the purchases for selling both taxable and exempt supplies or for both business and non-business activities, it must identify and split the input tax credit accordingly.
• The ITC will have to be claimed within the time limit laid down under the GST law, i.e. 30th November of the following financial year or the date of filing the annual GST return, whichever is earlier.
• The ITC is not disallowed under Section 17(5) of the CGST Act, otherwise known as blocked credits.

If these conditions are met, businesses can claim ITC on the GST paid on agarbatti. This can help businesses reduce their tax liability.

Advance Rulings Related to GST on Agarbatti

Advance Rulings on GST are decisions made by the Authority for Advance Rulings (AAR) or the Appellate Authority for Advance Rulings (AAAR) on specific issues concerning a business's GST tax liability. These rulings provide clarity on a business's tax liability and are binding on both the business that sought the ruling and the tax authorities.

One case in question relating to the taxability of agarbatti sought an advance ruling from the Gujarat GST AAR. 

A taxpayer, M/s Moksh Agarbatti Co., was offering one unit of dhoop along with a pack (10 pcs) of agarbatti. The taxpayer had sought an advance ruling to clarify whether they could claim ITC on the GST paid for manufacturing the dhoop and also on the purchase of the dhoop from a third-party vendor.

Verdict: The Gujarat GST AAR looked into the matter and ruled that the taxpayer cannot claim ITC on the GST paid on the inputs used for manufacturing the dhoop, nor on the purchase of the dhoop from a third-party vendor. This decision was made referencing Section 17(5)(h) of the CGST Act, 2017, which states that ITC is not available for goods that are lost, stolen, destroyed, written off, or disposed of as a gift or free sample. In this case, the dhoop included with the pack of agarbatti was considered a free sample, and thus no ITC was allowed.

In the same advance ruling, clarification was also sought on whether they could claim input tax credit on the insurance and maintenance of the motor vehicles that the business had purchased for the transport of the director and employees.

Verdict: The Gujarat AAR ruled that ITC could not be availed in this case either because Section 17(5)(ab) states that no input tax credit may be claimed on services of general insurance, servicing, repair and maintenance in so far as they relate to motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa). Clause (a) includes motor vehicles used for the transportation of persons with an approved seating capacity of up to 13 persons, including the driver.

Conclusion

The implementation of GST has had a significant impact on the agarbatti industry. Before GST, there were multiple taxes applicable to agarbatti, including excise duty, value-added tax (VAT), and central sales tax (CST). GST has subsumed these taxes, simplified the tax structure, and reduced the compliance burden for manufacturers. 

It is crucial for businesses to understand the GST system and its implications on agarbatti to avoid any potential penalties or disputes.

FAQs on GST on Agarbatti:

1. What is the HSN code of agarbatti in GST?

As we mentioned in the article, the HSN code for agarbatti is 33074100.

2. Are there any restrictions on claiming input tax credit (ITC) for agarbatti manufacturers?

Yes, ITC can only be claimed on inputs such as raw materials, packaging materials, and machinery used in agarbatti production. ITC cannot be claimed on goods or services that are used for personal consumption.

3. Is there any exemption from GST on agarbatti?

Yes, small businesses with an annual turnover of up to Rs. 40 lakhs in a financial year (Rs.20 lakh in special category states and Telangana) are exempt from GST registration and payment.

4. Is GST applicable on the packaging materials used for agarbatti?

Yes, GST is applicable to the packaging materials used for agarbatti production. The applicable GST rate will depend on the type of packaging material used.