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GST on by-products of milling industry - The ambiguity survives!


SEPTEMBER 19, 2022

By Brijesh Kothary, Joint Partner and Saundarya Sinha, Associate, Lakshmikumaran & Sridharan

THE CBIC has issued Circular No. 179/11/2022-GST dated 03.08.2022 to clarify on the taxability of various goods, including certain by-products of the milling industry. Until now, the milling industry was considering the emergence of by-products such as Chilka, Churi or Khanda as poultry or cattle feed and claiming exemption under GST laws under entry no. 102 of Notification No. 02/2017 - Central Tax (Rate) dated 28.06.2017. However, the clarification issued by the Board [paragraph 8 refers] on these products seems to suggest that these products are only used as ingredients in making cattle feed and are not cattle feed by themselves. It has been accordingly clarified that these products attract a GST of 5%.

As per the circular, these by-products go through a varying degree of processing so that they can be used as cattle feed. The processes are also in consonance with Indian Standard 2052:2009 in respect of compounded cattle feed. Unlike other circulars, which provide clarification and are generally perceived to have a retrospective effect, this circular proposes to regularize varied practices 'on as is basis'. This implies that the circular will not be given a retrospective effect to avoid multiple interpretations and genuine doubts. It may be pertinent to note that previously, the Government issued Notifications and introduced Section 117 and 120 to the Finance Act, 2022 to grant retrospective exemption on supply of unintended waste generated during the production of fish meal. In the present scenario, the so-called regularization may be favouring the Government, but it requires proper backing of law, which seems to be lacking. Therefore, instead of providing a clarification, which was the intention of the Government, the present circular seems to have further complicated the issue and regularized divergent practices being followed in the industry.

The circular seems to suggest that the goods that are subjected to processing in order to customize the colour, size, aroma, nutrition, purity, etc. in the factories would be exempted under the GST law; however, natural products such as Chilka, Churi and Khanda will be leviable to GST. This understanding of the CBIC appears to be contrary to the basic principle on how goods are subjected to indirect taxes in the supply chain. It must also be highlighted that cattle feed is tax free, however, the ingredients used to make such cattle feed is kept under the ambit of GST. This means that any person selling the cattle feed will have to bear an inherent cost of 5% towards GST on the inputs. It is to be noted that these products are only ingredients that makes cattle feed. Therefore, granting exemption on the end product while taxing intermediate products will only add to the cost to the end users.

It is also pertinent to note that in addition to poultry feed and cattle feed, the scope of exemption is wide enough to cover 'grass, hay & straw, supplement & husk of pulses, concentrates & additives' and the word "compounded" is not mentioned in the exemption notification before the words cattle feed. Further, there is no mention of ISO guidelines or specification in the cattle feed. However, this circular draws a comparison to such products with the Indian Standard 2052:2009 which also does not give any clarity.

The clarification given in the circular raises a very important question that the products in question were initially exempted from tax at the time of introduction of GST, but now, after over 5 years with such clarification, will lead to divergent practices and interpretation by the trade and departmental authorities. The cost of cattle feed is likely to increase as the main ingredients used in cattle feed will be subjected to tax. This will also lead to unwanted litigation and passing on of burden. The only possible option available with the mill owners who will want to continue claiming exemption on such by products will be to add some ingredients to it to bring it under the official definition of animal feed, thereby making it tax free.

In the view of the authors, the clarifications provided in the circular are very far away from the ground reality on tax treatment given to these products used as cattle feed. Hence, the industry may approach the Government to explain the practical problem involving taxability of the by-products of the milling industry and consider providing an exemption on these by-products i.e., Chilka, Churi and Khanda depending on end use through a separate entry in the exemption notification.

[The views expressed are strictly personal.]

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