‘Tobacco’ the name itself sounds so much hazardous to health. However, inversely, India is the second largest producer of tobacco and the third largest exporter of tobacco in the world. Figuratively, tobacco is a booming market and is likely to grow by 4.72% annually.
Various taxes like National Calamity Contingent Duty, Goods and Services Tax, Compensation cess, etc. are levied on the tobacco industry. However, interestingly, even after categorizing cess rate on tobacco products and cigarettes under a 28% GST slab, the tax burden on the tobacco industry has not reached the minimum rate of 75% as recommended by World Health Organization (WHO).
The base of the tobacco is the tobacco leaves which are plucked from the plants. Such tobacco leaves, after being plucked, can either be traded or can be used for further processing/ manufacturing. Post introduction of Goods and Services Tax (GST), tobacco is brought under the taxable net right from the stage of tobacco leaves.
In the present article, we will deal with a short but highly buzzed tax implication of GST on tobacco purchased from the farmers.
GST on Tobacco : Applicability
Broadly speaking, tobacco can be categorized under the following two categories as per the GST rate notification no. 01/2017 – Central Tax (Rate) dated 28th June 2017
GST rate notification
Description of Goods
Schedule and corresponding rates
109 of Schedule I
13 of Schedule IV
Unmanufactured tobacco; tobacco refuse (other than tobacco leaves)
After going through the above GST on tobacco is applicable, let us go through the relevant portion of reverse charge notification in order to understand the applicability of the same.
As we know, under GST, reverse charge is a mechanism through which GST is levied on the receiver/ purchaser instead of supplier of the goods.
Notably, notification no. 04/2017 – Central Tax (Rate) dated 28th June 2017 deals with the provisions relating to the applicability of the reverse charge mechanism on specified goods. Accordingly, as per S. No. 3 [Chapter heading 2401], reverse charge is applicable in the case the following conditions are satisfied-
- Condition 1 – Goods involved are ‘tobacco leaves’ falling under chapter heading 2401;
- Condition 2 – The supplier of the goods is an ‘agriculturist’; and
- Condition 3 – The recipient of the goods is any person registered under GST.
In nut-shell, when all the above three conditions are satisfied, the recipient i.e. GST registrant is liable to pay GST @ 5% [2.5% under CGST + 2.5% under SGST] on the purchase of tobacco leaves from the agriculturist.
GST on Tobacco : Latest Advance Ruling
Recently, a judgement pronounced by the Gujarat Authority for Advance Ruling on 9th March 2023, in the case of M/s. JCP Agro Process P. Ltd., has created a lot of buzz in the trade and industry. The briefs of the case and rulings thereon are summarized hereunder
Facts of the matter
Relevant question involved in the matter
Mainly two questions were raised by the applicant. However, the relevant question here is whether the purchase of raw tobacco from the farmers (which includes naturally broken tobacco known as ‘tobacco leaves/ tobacco bhukko’) is covered under RCM (Reverse Charge Mechanism) or not.
Relevant provisions as discussed
As per notification no. 1/2017- Central Tax (Rate) dated 28th June 2017, tobacco leaves falling under Chapter 2401 is classified under Schedule I. Accordingly, a total of 5% GST is payable on the same i.e. 2.5% under CGST + 2.5% under SGST.
Now, as per notification no. 4/2017- Central Tax (Rate) dated 28th June 2017, reverse charge mechanism is applicable in the following manner
Description of suply of goods
Supplier of goods
Receipt of the supply
Any registered person
Thus, as and when tobacco leaves are purchased by the registered person from the agriculturist, GST gets payable by the registered person.
It is held that in case of an intra-state supply of tobacco leaves (falling under chapter 2401) by an agriculturist to any person registered under GST, GST is payable by the recipient under the reverse charge mechanism.
Notably, agriculturalist as defined under section 2(7) of the Central Goods and Services Tax Act, 2017 means –
‘an individual/ a Hindu Undivided Family, who undertakes cultivation of land by own labour/ by the labour of family/ by servants on wages payable in cash or kind/ by hired labour under personal supervision or supervision of any member of the family.
In nut-shell, GST @ 5% i.e. 2.5% under CGST + 2.5% under SGST is payable by the registered person under reverse charge on the purchase of tobacco leaves/ bhukko from the farmer.
Applicability of GST on tobacco purchased from the farmers
GST applicability on tobacco purchased from the farmers is summarized hereunder
Type of GST levy
Reverse Charge Mechanism
Circumstances when leviable
Reverse Charge is leviable when –
[Refer S. No. 3 of notification no. 04/2017- Central Tax (Rate) dated 28th June 2017]
Rate at which GST is payable
5% [2.5% CGST + 2.5% SGST]
[Refer S. No. 109 of notification no. 01/2017- Central Tax (Rate) dated 28th June 2017]
Thus, with a view to somewhat relieve the farmers/ agriculturist from the tax compliances, GST is made applicable on the registered purchaser of the tobacco leaves under reverse charge mechanism.
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