The only Indian businessman who cannot claim input tax credit under GST


That the farmer has historically had one of the most unrewarding and thankless jobs in India is fairly common knowledge. Data sets after data sets show how Indian farmers have remained hopelessly caught between ineffective policy and equally ineffective implementation — through the Five-Year-Plans era, through successive governments, and through myriad policy recasts since Independence.

The plight of the farmer has changed little even under GST, the new indirect tax regime that aims to revolutionise all kinds of businesses. Here is one piece of statistics that underlines how GST has so far dealt a raw deal to agriculture, the sector that accounts for half the country’s total employment.

Like in the pre-GST era, agriculture continues to be at the receiving end of hazy policies even now: In the new regime, farmers are the only businessmen who can’t claim input tax credit — the mechanism that allows a manufacturer/producer to adjust tax liabilities on output (sales) against GST paid on inputs.

A bitter harvest

Here is an example that makes clear how input credit bypasses the farmer.

As the sowing season approaches, a farmer goes to a shop to buy pesticides, fertilizers and other farm inputs. He comes back, uses all these inputs to produce the output. If things go well, he harvests his crop and sells it to make money.

When the farmer is buying pesticides and fertilizers, he is buying everything in retail and paying a good amount of GST on his purchases. On pesticides, he is paying a GST rate as high as 18%.

Similarly, the input manufacturer — the businessman the farmer is buying his inputs from — is also paying GST on the raw material he uses to produce his goods.

But this is where the similarities end. The input manufacturer would go on to reduce his liabilities by way of input credit — s/he can set off the tax liability on sale proceeds against the GST paid on raw material. In stark contrast, the farmer has that door closed on him.

Why can’t the farmer claim input credit for the GST he paid while buying his inputs? The reason is simple: The farmer’s produce — like all farm produces — attracts zero GST, which means GST won’t come into the picture when he is selling his goods.

It’s as simple as this: When the GST rate is zero, the input credit that can be claimed would also be zero.

It means the manufacturer of fertilizers and all other farm inputs can claim ITC, but the farmer cannot. That makes farmers the only businessmen in India for whom the biggest bonus of the GST mechanism is out of bounds.

Some analysts view this as something that amounts to travesty of policy. According to Bhagirath Choudhary, founder-director of South Asia Biotechnology Centre (SABC), “The inability of farmers to claim input credit tax paid on farm inputs violates the spirit and foundational principles of the GST system in India.”

Soldiers of the wasteland

Smallholder farmers engaged in the production of cereals, pulses, edible oilseeds, fruits & vegetables, and other commodities pay about Rs 14,500 crore of GST annually on farm inputs, SABC has found.

These farm commodities feed 135 crore Indians and also contribute significantly to the export of agriculture and processed food products.


“The smallholder farmers should, therefore, be provided a fair treatment in virtue of GST principles as they purchase farm inputs for raising crops, and do not consume them as final goods. Therefore, there must be a mechanism for availing input tax credit,” says Choudhary.

“It is a profound tragedy that the hardworking farmers are unable to reap benefits from the claim of input credit tax on paid GST due to the nature of their business, exclusion of farm commodities from GST, and non-enrolment of farmers on GST,” says Dr CD Mayee, former Chairman ASRB, Govt of India and President of South Asia Biotechnology Centre, New Delhi.

The complexity of GST is also one reason, says Mayee. This complex nature means farmers organizations including farm bodies of different political parties are unable to get a grip on the system’s nuances; they have not been able to help the farming community who is losing Rs 14,500 crore every year due to inability to claim input tax credit, he adds.

Some put part of the blame on the general lack of knowledge of the Indian farmer. According to P Chengal Reddy, Chief Advisor, Consortium of Indian Farmers Associations (CIFA), “99% of farmers are ignorant of governmental policies including GST or export bans or import policies.”

CIFA, the organisation he advises, has many leaders aware of crop-related issues but not many with comprehensive knowledge, Reddy says.

Reddy reckons that sensitising farmers may be difficult but not impossible. Efforts are already being made towards that end, but one is not sure how long it might take, he adds.

How not to bite the hand that feeds

Many experts agree that the main issue is not the complexity of GST or the lack of awareness of the Indian farmer, rather it’s the GST rulebook itself that puts all agricultural products in the zero-tax slab. It means that when the farmer is making a sale, s/he has no option to claim credit, which, in case of any other businessman, would have offset the GST paid while purchasing input materials.

Is there a way out? SABC’s Choudhary cites a specific exemption rule to suggest one: “This is in line with the GST principle that goods and/or products consumed as intermediaries are eligible for input tax credit. Hence, GST exemption on farm inputs should be exempted in line with the exemption granted on seeds, animal & poultry feed – other two critical farm inputs.”


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