FEBRUARY 25, 2014

By Pradeep Jain, CA & Aashish Bohra

FINANCE Minister announced the interim budget of UPA-2 government on 17/02/2014. No major changes have taken place from the point of view of taxation as it was interim budget only. One major change that has affected service tax law was grant of exemption to loading, unloading, packing, storage or warehousing of rice. Moreover, clarification was issued as regards non leviability of service tax on its transportation. It is observed that with this amendment made in the mega exemption notification, the Finance Minister has not deviated from his earlier stand that "rice is not an agricultural produce" as the exemption is being given to rice by way of a separate entry in the mega exemption notification and no clarification has been made with respect to the definition of agricultural produce. However, such an approach of exempting the services in relation to loading, unloading, packing, storage and warehousing will certainly give rise to many controversies. This article tries to bring out the controversies arising in future due to this clarification.

Exemption in Negative list:-

Now let us go into the history. To clarify the whole matter, we need to start from 01/07/2012 i.e. the day on which the concept of negative list was introduced. Negative list initially contained 17 services which were exempt from the service tax. The relevant portion of the negative list is given below:

"Section 66D specifies following services as non taxable:

(d) services related to agriculture or agriculture produce by way of –

i. agricultural operations directly related to production of any agricultural produce including cultivation, harvesting, threshing, plant protection or seed testing;

ii. Supply of farm labour;

iii. processes carried out at an agricultural farm including tending, pruning, cutting, harvesting, drying, cleaning, trimming, sun drying, fumigating, curing, sorting, grading, cooling or bulk packaging and such like operations which do not alter essential characteristics of agricultural produce but make it only marketable for the primary market;

iv. Renting or leasing of agro machinery or vacant land with or without a structure incidental to its use;

v. loading, unloading, packing, storage or warehousing of agricultural produce;

vi. Agricultural extension services;

vii. Services by any Agricultural Produce Marketing Committee or Board or services provided by a commission agent for sale or purchase of agricultural produce."

For the removal of the doubts for the above para agricultural produce means:

"Agricultural produce" means any produce of agriculture 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;

Thus from the above it is amply clear that the aim of the government was to exempt the farmers from the levy of the service tax by giving exemption to the agricultural produce. Here government has ensured that the exemption is limited to the farmers and has not extended to the retailers and the middle man as the exemption is limited to the agriculture produce 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.

Clarification by Finance Minister :- There was no controversy about the exemption available to agricultural produce and it was implied that the rice is also included in the same. But the position was changed after the clarification by Hon'ble finance minister by writing a letter to his colleague in the Government, Prof. K.V. Thomas, Minister of OS state for Consumer Affairs, Public and Food Distribution. This letter clarified the definition of agriculture produce and stated that Rice and cotton cannot be termed as an agricultural produce. Hence, the services related to these goods will not be covered under negative list.

Agricultural produce, as defined under service tax law means any product that hasn't been processed at all or has only been subjected to minor process by a cultivator or producer that doesn't alter its essential characteristics but makes the commodity ready for sale in the primary market. It has been opined that paddy is an agricultural produce but rice is not since it has been processed and de-husked in a mill. Thus, it has been opined that it will not be classified under the definition of "agricultural produce" and thus, allied services will be subject leviable to service tax.

Thus from the above it is clear that the Finance minister wants to clarify that if an agricultural produce goes to the mill for the purpose of de-husking or any other process then such agriculture produce loses its identity and ceases to be an agricultural produce and will not be covered under the negative list.

Here it seems that Finance minister has ignored the basic definition of agricultural produce which clearly states that agriculture produce is the one 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.

Now let us analyse the process of dehusking of rice:

Paddy has to be dehusked and polished to convert it into the marketable form of white rice . In the past, dehusking of the paddy was done manually by pounding the paddy in a receptacle with a wooden stump. This was later replaced by mechanical dehusking with the use of rubber rollers, which gave a greater dehusking efficiency and less grain breakage. When Malaysia started its factories in the 1970's, the rollers produced were based on silica-filled styrene-butadiene rubber (SBR) compounds because of their longer service life and better thermal stability compared to natural rubber (NR) rollers.

From the above it clear that a paddy cannot be said marketable until it is dehusked, and in current era everyone wants to save their time and money and in most of the cases the rollers are used to dehusk paddy. These rollers are usually used by the mills carrying dehusking process. Thus it is a mandatory process for the paddy to go into the mill and to get itself dehusked and get converted into rice to be a marketable produce. But the clarificatory letter of finance minister declared that an agriculture produce which goes to mill for dehusking disqualifies for being eligible to be covered by the definition of agriculture produce.

The clarification by the Finance Minister led to the conclusion that the services such as loading, unloading and warehousing of rice, construction services for warehouse of rice etc. are chargeable to service tax.

Amendment in this budget:- There was much hue and cry all over India over the clarification issued by the Finance Minister. The issue was again taken up by the Finance Minister in his interim budget 2014-15. In order to give exemption to rice, Finance Minister introduced a new entry in the mega exemption notification which reads as follows:

"40. Services by way of loading, unloading, packing, storage or warehousing of rice."

Hence the loading, unloading, packing, storage and warehousing of rice were exempted by this entry. But for service tax liability on the transportation of goods by road or rail, it was clarified that the rice will be included in Food stuff. The transportation of Food stuff is exempted by entry number 20 (i) and 21(d) of the Mega Exemption Notification. The said entry is produced for the sake of convenient reference as follows:-

20. Services by way of transportation by rail or a vessel from one place in India to another of the following goods-

(d) foodstuff including flours, tea, coffee, jaggery, sugar, milk products, salt and edible oil, excluding alcoholic beverages;

21. Services provided by a goods transport agency, by way of transport in a goods carriage of:-

(d) foodstuff including flours, tea, coffee, jaggery, sugar, milk products, salt and edible oil, excluding alcoholic beverages;

The implication of this clarification was that the transportation of rice by road or rail was already exempted from 1.7.2012. The exemption for loading, unloading, packing, storage and warehousing of rice was exempted from this budget i.e. from 17.2.2014.

Effect of the amendment and clarification in budget:-

The definition of "agricultural produce" will not include rice. Nobody can think that rice is not agricultural produce. But since the Finance Minister has given a clarification earlier, hence he is sustaining his earlier clarification. To avoid the service tax liability for transportation, it was covered under "food stuff" and to exempt loading, unloading and warehousing services - a new entry was created. But the impact of the amendment does not alter the ambiguity and confusion as regards service tax liability on loading, unloading, warehousing for the period from 1.7.2012 to 16.2.2014. However, it has been clarified that there is no liability for transportation of rice since beginning as the Finance Minister clarified in the interim budget that it is covered under "food stuff" since inception of the negative list.

Other Implications:-

Will this new amendment and clarification issued by the Finance Minister have an impact on other agricultural produce also? Now, for each and every agricultural produce on which process is undertaken, it has to be seen -

++ Whether the process is undertaken by cultivator or producer?

++ Whether the process undertaken on any agriculture produce has altered its basic characteristics?

++ Whether the process undertaken is essential to make it marketable for primary market?

Now these questions will lead to ambiguity for every agricultural produce where any process is undertaken to get the finished goods. Since these terms are subjective, the department will see service tax liability in each and every case. But the basic intention of the Government to give exemption to agricultural produce will be lost.

Some of the examples are enumerated below by authors of this article to see the impact:-

++ Green tea: department may allege that it fails to qualify the definition of agriculture produce as tea leaves are taken steamed and the processed in factory.

++ Wheat and other foods grains are also generally dehusked in a mill.

++ Banana is also further processed with the help of chemicals. The department may say that it will change the basic characteristic of the product.

++ Even the pulses are also obtained in the factory only.

The above examples clearly underlines that this will give rise to litigation between department and the assessee. This will have political and regional controversies also as we observed in case of rice. But on the part of fraternity of consultants, the authors are very thankful for such clarification.