JANUARY 14, 2014

By G Jayaprakash, Advocate

WHETHER loading, unloading and stacking of rice for Public Distribution System is a taxable service with effect from 1.7.2012? This query is raised by one of my client when he received instructions from Food Corporation of India to comply with Service Tax liabilities on loading, unloading and stacking of rice.

I have searched for rice as an Agricultural produce in the web. The result:-

India is one of the world's largest producers of white rice and brown rice , accounting for 20% of all world rice production. Rice is India's preeminent crop, and is the staple food of the people of the eastern and southern parts of the country. Rice can be cultivated by different methods based on the type of region. But in India, the traditional methods are still in use for harvesting rice. The fields are initially ploughed and then fertilizer is applied which typically consists of cow dung and then the field is smoothed. The seeds are transplanted by hand and then through proper irrigation , the seeds are cultivated. Rice grows on a variety of soils like silts, loams and gravels. It can also tolerate alkaline as well as acid soils . However, clayey loam is well suited to the raising of this crop. Actually the clayey soil can be easily converted into mud in which rice seedlings can be transplanted easily. Proper care has to be taken as this crop thrives if the soil remains wet and is under water. {Wikipedia}.(Emphasis supplied).

From the above information, rice is the produce cultivated by farmers. Even without referring to the above details from the web, ordinary people understand that what is being cultivated is rice and it is an agricultural produce. In certain places it may be referred as paddy rice or paddy before removal of the husk. Husk is being removed by threshing the paddy rice. But when the Hon'ble Finance Minister of India says rice is not an agricultural produce, is the nation bound to swallow the same? Fortunately for the Indians, the Hon'ble apex court held in Re: Cess on agriculture produce case (1986) that the statement of the Finance Minister even in Parliament is not the law of the land. So his letter to another Minister will not be the law of the land and it can be subjected for interpretation/ scrutiny.

These introductions are necessitated to seek the attention of the learned readers to the letter written by the Hon'ble Finance Minister to the Minister of State (Independent charge), Consumer Affairs, Food and Public Distribution expressing inability to consider rice as an agricultural produce so as to be eligible to treat it under Negative list as per Section 66D of Finance Act, 1994.

Copy of the letter is reproduced below.

The reason adduced by the FM in denying the benefit to rice is that the definition of agricultural produce does not contain rice as defined under Section 65B(5) of the Act and hence Section 66D(d) (v) of the Act is not applicable to rice.

Sections 65B(5) of Finance Act 1994: Agriculture 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 .

Section 66D(d)(v): Services relating to agriculture or agricultural produce by way of loading, unloading, packing, storage or warehousing of agricultural produce.

A casual look at Section 65B(5) indicates that it does not specify any commodity within its ambit to state that rice is not included in it as stated by the Hon'ble FM. An analysis of the above provisions of the Act indicates that produce of agriculture without any processing or if some processing is done as is usually done by a cultivator or producer which should not alter the essential characteristics to make it marketable for the primary market is an agricultural produce. Rice with husk is the direct product of harvesting and by threshing the husk is removed from the rice. The activity of threshing is covered under Negative List vide Section 66 D(d)(1).

The primary market for the rice is without husk can be accepted based on the fact that the cultivators or producers of rice present the same for procurement by Government Agencies including Food Corporation of India as rice without husk. These agencies intervene in the market and procure rice to ensure minimum support price to the cultivator. To render it fit for marketing in the primary market de-husking of rice is essential and the same is carried out by the cultivators is evident as per records of these Agencies. For the bulk traders also the farmers supply rice after de-husking. Hence the first condition to fit in de-husked rice as an agricultural produce is satisfied. The next issue is does the de-husking alter the essential characteristics of rice harvested from the fields? An absolute NO is the answer. De-husking is nothing but similar to removal of pod or peeling of skin of fruits which never alter the basic character of the fruits. Rice is preserved with husk only for using it as seed. In as much as de-husking of rice does not alter the basic characteristics of the harvested rice, the activity of threshing to de-husk the same shall not render it a non agricultural produce.

De-husking of rice is distinctly different from flouring of rice. To make it more clear, reference is made to Guidance Paper on Service Tax 2012, Question4.4.5 – Would potato chips or Tomato ketchup qualify as agriculture produce? Answer is No since the process alters the essential characteristics of farm produce. As stated earlier de-husking of rice does not alter its essential characteristics.

The interpretation that rice unlike wheat is not an agricultural produce for Service Tax purpose is incomprehensible for the simple reasons stated above. Why differentiate rice and wheat for the GST? Whatever be the reasons, the Hon'ble Minister of State for Consumer Affairs, Food and Public Distribution, the man behind the Food Security Bill that is to eradicate hunger from society, belongs to the masses. It is requested that since the statement of Hon'ble FM is not the law on the subject, the same may be allowed to be interpreted by the judiciary. The Hon'ble Minister for Consumer affairs, Food and Public distribution may allow/direct the Food Corporation of India to challenge the same before court of law. Otherwise, after general elections, these charges will inflate the price of rice sold through public distribution system because FCI cannot absorb the burden of Service Tax for a long time.