Impact of GST on the Agricultural Sector in India

Goods and Services Tax (GST) has significantly changed India’s agricultural sector. The GST system has streamlined the taxation of agricultural goods and services, promoting greater transparency, efficiency, and market integration across India.

This article explains the impact of GST on the agricultural sector, detailing GST rates on agricultural commodities, inputs, and machinery and answering common questions related to GST on agriculture.

GST overview and its effect on agriculture

Under the GST regime, the agricultural sector gets numerous benefits, including exemptions on most basic agricultural produce.

Essential agricultural goods such as grains, fresh fruits, and vegetables are exempt from GST. These items are exempted to keep them affordable for consumers and protect farmers from taxation on primary produce. However, products undergoing processing may fall under higher GST slabs.

GST rates on agricultural commodities in India

GST rates on agricultural commodities vary based on their level of processing. Below is a breakdown of the applicable GST rates for different categories of agricultural goods:

GST Rates on agricultural inputs and machinery

Agricultural inputs and machinery also fall under various GST rates. Here’s a detailed breakdown:

This framework under GST allows farmers to save on taxes for essential tools, fertilisers, and machinery, although some products, like pesticides and machinery, are subject to tax, which increases input costs.

Practical implications of GST for farmers

• Market integration: GST has significantly improved interstate trade by removing state-level taxes (CST/octroi) and introducing an e-way bill system. This has facilitated the smoother movement of goods across states.
• Reduction in cascading Taxes: Agricultural goods faced cascading taxes at various points before GST. GST has eliminated these, ensuring farmers and traders don’t bear multiple layers of tax, leading to lower costs.
• Input Tax Credit (ITC): Businesses involved in agriculture can avail of ITC (tax paid for inputs) such as fertilisers and farm machinery, reducing overall operational costs. However, farmers selling exempt produce cannot claim ITC.

Challenges

While GST has positive effects on agriculture, it comes with specific challenges:

• Increased input costs for farmers: While most agricultural inputs are exempt or taxed at lower rates, machinery and pesticides are taxed at 12% and 18%, respectively. This scenario increases the burden on farmers.
• Compliance issues: Smaller farmers unregistered under GST continue to face challenges. Their inability to avail of ITC on inputs can be a concern for those buying from registered traders.
• Impact on small farmers: GST does not impact smaller farmers who sell unprocessed goods, but as value-added services like processing and packaging become more prevalent, larger agricultural businesses might find the system costly and complex.

The GST regime has significantly simplified the taxation system for India’s agricultural sector, ensuring that primary agricultural products remain tax-free. At the same time, processed goods are taxed to contribute to the government’s revenue.

The tax system has streamlined interstate trade, reduced cascading taxes, and improved market integration. However, challenges remain for smaller farmers and the agricultural machinery sector.