GST vs Income Tax in Agriculture

 By CA Surekha Ahuja

Why “Tax-Free” Agriculture Is One of India’s Most Audited, Litigated & Penalised Sectors

The Great Agricultural Tax Illusion

Agriculture in India is widely believed to be “outside tax”.
That belief is only half true—and dangerously incomplete.

Under the Income-tax Act, agricultural income enjoys a near-absolute statutory exemption. Under GST, however, agriculture survives only within a narrow, evidence-driven corridor, guarded by supervision tests, end-use verification, system reconciliations, and strict documentation standards.

This asymmetry has quietly turned agriculture into a high-risk audit sector, particularly for rice millers, agri-processors, land lessors, contract farmers, and exporters.

The ICAI Handbook on GST Applicability to the Agricultural Sector (Jan 2026) crystallises what field audits already reveal:

Most GST disputes in agriculture do not arise from evasion.
They arise from applying Income-tax logic to GST law.

This article examines agriculture purely from an agri-audit and enforcement perspective—how defaults arise, how officers frame demands, and how penalties and litigation can be avoided before notices are issued.

The Structural Conflict That Creates Litigation

Dimension	Income Tax Act	GST Law
Nature of relief	Absolute exemption	Conditional exemption
Primary test	Source of income	Activity, supervision, end-use
Evidence required	Minimal	Extensive & continuous
Officer discretion	Limited	High
Penalty exposure	Rare	Automatic & severe

Agri-Audit Insight
What is automatically exempt under Income Tax becomes exempt only if conclusively proven under GST—every year, every month, every transaction.

Rice Milling & Agri Processing - The Largest Silent Default Zone

Rice milling is not agriculture. It is an industrial manufacturing activity.
This position is settled across audits, adjudication, and appellate practice.

• Rice packed above 25 kg → Exempt output

• Rice bran, broken rice, consumer packs → Taxable outputs

• Governing law → Rule 42 / Rule 43 ITC reversal

Ownership of agricultural land, family involvement, or personal supervision has no legal relevance once activity crosses cultivation.

GST registration becomes mandatory on turnover breach, regardless of agricultural lineage.

Where Rice Mills Commonly Fail

• Exempt rice sold alongside taxable by-products

• Common packing material ITC not segregated

• Provisional ITC claimed monthly and never reversed

• GSTR-9 reconciliation delayed or cosmetic

• ITC claimed as expense under Income-tax and retained under GST

How Officers Build the Case

• Wrong availment of common credit

• Suppression of exempt-linked ITC

• Interest under section 50(3) treated as automatic

• Penalty proceedings under sections 73 or 74

Critical Caution
Rice mills rarely lose on tax rate.
They lose on input attribution discipline.

Audit-Safe Architecture

• ERP-level segregation of packing inputs

• Lot-wise input–output mapping

• Monthly Rule-42 workings preserved

• Timely GSTR-9 Table 6B reconciliation

Agriculturist Exemption — Supervision Is the Only Shield

GST exempts only those agriculturists who personally supervise cultivation under section 23(1)(a).

The ICAI aligns with the Supreme Court’s classical test in Raja Benoy Kumar Sahas Roy:

Cultivation through hired labour qualifies only where personal supervision exists.

Enforcement Position

As clarified by the Central Board of Indirect Taxes and Customs, exemption survives only when:

• Produce is self-cultivated

• Supervision by owner or family is demonstrable

• Processing is limited to cleaning, drying, sorting

Registration becomes compulsory where:

• Mechanised harvesting occurs without supervision

• Commercial dryers, hullers, or mills are used

• Trading of third-party produce is undertaken

Audit Red Flags

• Mechanised operations with no supervision evidence

• Contract farming through corporate entities

• Mixing own produce with purchased produce

• Agricultural land records masking commercial activity

Most Common Litigation Fallacy

“The land is agricultural, therefore the activity is exempt.”

Audit Reality
GST evaluates what you did, not what the land is called.

Non-Negotiable Defence

Every agriculturist claiming GST exemption must maintain:

• Labour attendance and wage registers

• Supervision timestamps

• Geo-tagged field photographs

• Crop-cycle activity logs

Absence of this evidence converts exemption into taxable supply with retrospective exposure.

Agricultural Land Leasing - Where Income-Tax Logic Causes Maximum Damage

Under Income Tax, lease rent from agricultural land remains exempt.
Under GST, exemption applies only if the land is actually used for cultivation by the lessee.

The exemption follows end-use, not ownership.

Audit Trigger Indicators

• Warehousing, cold storage, or construction on leased land

• Lessee is trader or processor

• Lease deed silent on agricultural-use restriction

• No cultivation or supervision evidence

Hidden Penalty Exposure

Where commercial use is established and the lessee is unregistered:

• The lessor faces penalty exposure under section 122(1)

• Ignorance or reliance on revenue records offers no defence

Audit-Safe Leasing Architecture

• Crop-specific exclusive use clause

• Right to inspect and terminate on deviation

• Quarterly geo-tagged usage certification

• Revenue and stamp documentation alignment

Agricultural Exports -Refund Rejection Is the New Litigation

Export of agricultural goods is rarely disputed.
Refund claims are.

Authorities treat agri-export refunds as a systems-matching exercise, not an exemption debate.

Audit Preference in Practice

• LUT route where supervision and exemption are unquestionable

• IGST-paid route where processing exists or ITC exceeds 20 percent

Strategic Insight
Paying IGST often converts a risky exemption dispute into a clean refund verification.

Most Common Refund Rejection Triggers

• GSTR-1 and GSTR-3B mismatch

• Shipping Bill not linked with EGM

• LUT expired mid-year

• ITC claimed on exempt outputs

• Improper merchant export endorsements

Refund Survival Protocol

• ICEGATE pre-validation before GSTR-1

• Continuous LUT monitoring

• Avoid inverted duty claims on exempt supplies

• Invoice–shipping bill–EGM correlation file

How GST Officers Actually Build Agricultural Cases

Area	Officer Focus	Default Risk	Preventive Shield
Cultivation	Supervision proof	Forced registration	Cultivator logbook
Processing	ITC reversal	Interest & penalty	ERP segregation
Land leasing	End-use	18% GST & penalty	Lease controls
Exports	System mismatch	Refund denial	ICEGATE sync

Field Pattern
Cases rarely start with intent.
They start with absence of evidence.

Why Penalties Escalate Rapidly in Agriculture

Once GST exemption collapses:

• Tax becomes retrospective

• Interest is automatic

• Penalty exposure multiplies

• Registration is back-dated

• Refunds and credits get blocked for years

Agri-Audit Reality
Agriculture carries lower tax rates but higher penalty ratios because failures are evidentiary, not interpretational.

The Preventive Architecture Every Agri Client Needs

Non-Negotiable Controls

• Cultivator supervision log

• ERP-based input segregation

• GST-aware lease drafting

• Periodic agri-GST internal audits

• Refund pre-validation checklist

Strategic Advisory Insight
A properly structured voluntary GST registration often:

• reduces net tax cost,

• improves buyer credibility, and

• eliminates retrospective shock demands.

Final Professional Verdict

Agriculture is not outside GST.
It is inside GST—with conditions.

Under GST:

• Supervision creates exemption

• Documentation sustains exemption

• Assumptions destroy exemption