GST Implications on Flour mills under PDS scheme

Table of Contents:

1. Introduction
2. About PDS Scheme
3. Issues for Consideration
4. Taxmann’s Analyses
5. Taxmann’s Comments & Suggestive Way Forward

1. Introduction

Under the erstwhile Indirect tax laws, Flour mills operating under the Public Distribution System (‘PDS scheme’) were exempted from tax on their supplies. However, under the current GST regime, various Flour Mills were claiming exemption, whereas others were paying tax at 5%.

Last year, investigations were initiated by the Directorate General of GST Intelligence (‘DGGI’) in the State of West Bengal. Authorities alleged that GST has not been paid by these Flour mills as per the requirements of the GST Law as their activity is exigible to GST at the rate of 18%. Based on this, various Flour Mills paid GST at the rate of 18% during the investigation stage.

2. About PDS Scheme

The PDS scheme operates in the below manner

• • Initially, the raw wheat is procured by the Food Corporation of India (‘FCI’) from the farmers.
  • The State Governments then purchase the wheat and allocates it to the Flour Mills for processing into fortified wheat in the gunny bags.
  • Flour Mills processes the wheat into fortified flour by crushing the wheat and adding the nutrients (also known as the ‘Fortification’ process). During conversion, By-products such as Bran, refractors, gets emerge.
  • After processing into fortified flour, it is packed and transported to the State Government Warehouses or directly to the Ration shops by the Flour Mills.
  • The Beneficiaries (BPL holders, etc.) of this PDS scheme then purchase the fortified flour from these Ration shops at subsidized prices.

3. Issues for Consideration

In the above backdrop, one may have the following queries:

a) What is the Nature of activity carried out by the Flour Mills under the PDS scheme?

b) What would be the value of supply considering the treatment of Gunny bags and By-products?

c) Whether any exemption is available to Flour mills in respect of the impugned supply under GST?

d) What would be the GST Rate on the impugned service (in the case where exemption is not available)?

4. Taxmann’s Analysis

This part includes our analyses based on the above issues.

4.1 Impugned activity qualifies as Job work service & Composite supply

The GST law provides[1] that in the case of treatment or application of a process on the goods that belongs to another person then such activity would qualify as supply of service. The Flour Mills perform processing activity on the wheat that belongs to the State Government. Thus, their activity qualifies as the supply of service.

Further, the State Government registers itself under GST law to deduct the Tax (TDS), thus the service of Flour Mills qualifies[2] as Job work service[3].

The services by the Flour Mills consist of two or more taxable supplies (such as conversion, fortification, transportation, etc.) which are naturally bundled and supplied in conjunction with each other in the ordinary course of business. Thus, as per the provisions[4] of GST law, the Impugned service is a Composite supply wherein the principal supply is the supply of service of conversion of wheat into flour.

4.2 Valuation of supply

The Gunny bags given to Flour mills are in the nature of Non-monetary consideration and thus, as per GST law[5], to be included in the value of supply.

The Directorate of Commercial Taxes and Foods & Supplies Department of West Bengal is of the view that the By-products generated, while processing the wheat in to flour, is a Non-monetary Consideration made to the Flour mills.

Thus, the value of these Non-monetary considerations based on the Open Market Value should be added to the valuation of the supply.

4.3 Exemption from GST

Under the GST law, the exemption notification[6] exempts a Composite supply of goods/services provided to the State Government by way of any activity in relation to any functions entrusted to Panchayats under Article 243G or to Municipality under Article 243W of Constitution and value of supply of goods does not exceed 25% of the value of the composite supply.

In the case of impugned supply by Flour Mills

• • The supply is a composite supply to State Government,
  • Supply made is in relation to function entrusted to a Panchayat under Article 243G or to a Municipality under Article 243W of the Constitution under Eleventh Schedule of the Constitution
  • The value of goods supplied in the Composite supply does not exceed 25 percent of the value of the Composite supply. ( it may vary from case to case)

Thus, the Flour mills operating under the PDS scheme can claim the said exemption in the case where the value of goods supplied by them does not exceed 25 percent of the value of the Composite supply.

4.4 Taxability under GST

Where the Flour Mills are not eligible to claim the exemption from GST (i.e. in the case where the value of goods supplied exceeds 25 percent of the value of Composite supply), their service would be classified under the heading 9988, and GST is required to be paid at 5 %.

5. Taxmann’s Comments & Suggestive Way Forward

Based on the above analysis, the impugned activity qualifies as a Composite supply & Job work service under the GST law. Further, the Flour Mills can claim the exemption provided the value of goods supplied does not exceed 25 % of the value of Composite supply, otherwise, their supply is taxable under GST at 5 %.

Based on the above, Flour Mills may analyze their scenarios in order to determine the GST implications on their activity. Also, in the case where Flour Mills have paid an amount during the investigation stage, they can claim such amount as a refund along with interest.

[1] Entry No 3 of Schedule II of the CGST Act

[2] Section 2(68) of the CGST Act

[3] Also clarified by CBIC in the Circular No. 153/09/2021-GST dated June 17, 2021

[4] Section 2(30) of the CGST Act, 2017

[5] Rule 27 of the CGST rules, 2017

[6] Notification No. 12/2017 – Central Tax & Notification No. 09/2017 – Integrated Tax both dated June 28, 2017