Tobacco leaves are plucked from the plants. These leaves are green in color and very tender, delicate and very high in moisture. These leaves, at this stage, will be damages unless properly dried immediately. These leaves are cured by sun curving, air curving, flue curving, fire cutting etc., By these methods the leaves are dried and the moisture levels are reduced to make them fit for primary marketability by the farmer.
The tobacco leaves can either be traded in the market as such or may be graded as per their color, length and other parameters. The leaves are then traded or used for further manufacturing. The tobacco may also be butted and redried without threshing.
The tobaccos leaves are subject the threshing. The moisture contents of the tobacco are made even through re-drying. After threshing and redrying the leaves are sent to the manufacturers for further processing and use in manufacture of cigarettes, cigars, chewing tobacco and other tobacco products. In this process there will be many intermittent stagers like cut-rack etc., which are commonly referred to as unmanufactured tobacco even under the earlier period it is called manufactured tobacco.
In ‘grading’ the tobacco leaves are segregated into various grades depending on their size, length, color or share and other physical parameters of the leaf. The tobacco leaves so graded will be packed into b ales and wrapped in jute bags for onward supply to other tobacco dealers or manufacturers.
In the process of ‘butting’ the edge of the tobacco leaf, which is called as ‘butt’ is removed by manually chopping them off. This will not alter any other character of the leaves. It is a very rare and occasional requirement of the buyer and only 2 to 3% of the total tobacco is ordered for butting.
After the introduction of GST, tobacco is brought under the taxability from the state of tobacco leaves. The tobacco is coming under the two categories ‘tobacco leaves’ and ‘unmanufactured tobacco (other than tobacco leaves)’. The tariff heads for the said items are covered under Notification No. 1/2017-Central Tax (Rate), dated 28.06.2017 as detailed below-
- Tobacco leaves – Schedule I, Sl. No. 109 – HSN 2401 – GST 5% (CGST – 2.5% and SGST – 2.5%);
- Unmanufactured tobacco, tobacco refuse (other than tobacco leaves) – Schedule IV, Sl. No. 13 – HSN – 2401- GST 28% (CGST – 14% and SGST – 14%).
Various tobacco manufacturers approached the Authority for Advance Rulings, Andhra Pradesh, for the applicability of GST and the rate of GST on such tobacco leaves. The following case laws are relevant for this purpose-
In all these applications the applicants sought Advance Ruling on the following issues-
- What is the rate of GST applicable on tobacco leaves procured at tobacco auction platforms or directly from farmers, which are cured and dried by farmers themselves?
- What will the applicable rate of tax if the applicant purchases tobacco leaves from other dealers who have purchased them from farmers, for the purpose of trading?
- What will be the applicable rate of tax if the applicant segregates the tobacco into grades depending upon their size, color/shade, length, texture of the leaf, etc., and sells such graded tobacco leaf?
- What is the applicable rate of tax if the tobacco leaves are butted and sold to other dealers?
- What is the applicable rate of tax if the applicant gets the tobacco leaves re-dried without getting them threshed?
- What will be the applicable rate of tax, if the applicant gets the tobacco leaves threshed and redried?
- What will be the applicable rate of tax if the applicant gets the tobacco threshed and redried on job work basis at others’ premises and then sells such threshed and re-dried tobacco leaves to others?
The applicants submitted the following before the Authority for Advance Ruling-
- Prior to the introduction of GST, the products of tobacco leaves and unmanufactured tobacco leaves were leviable to tax under VAT and Central Excise Laws.
- The CESTAT, Hyderabad had set aside the service tax demand on the process of threshing and redrying of tobacco leaves saying that these are intermediate production process carried out in relation to agriculture and exempt from service tax.
- The expressions ‘tobacco leaves’ and ‘unmanufactured tobacco leaves’ are not defined in the tariff, and therefore the classification of these products become a contentious issue.
- The classification of tobacco under GST is not in tune with that of the Customs Tariff.
- The GST tariff mentioned only 4 digits whereas Customs Tariff employs full 8 digit HSN Code. As such there is not clarity as to the further sub classification of the tariff heads under GST.
- As per the Customs Tariff the relevant heads are as under-
- 2401 – Unmanufactured tobacco; tobacco refuse.
- 2401 10 – Tobacco stemmed or stripped
- 2401 10 10 – Flue Cured Virginia Tobacco
- 2401 10 20 – Sun cured Country (Natu) Tobacco
- 2401 10 30 – Sun cured Virginia tobacco
- 2401 10 40 – Burley tobacco
- 2401 10 50 – Tobacco for manufactures of Bidis, not stemmed
- 2401 10 60 – Tobacco for manufactures of Chewing tobacco
- 2401 10 70 – Tobacco for manufactures of cigar and cheroot
- 2401 10 80 – Tobacco for manufactures of Hookah tobacco
- 2401 10 90 – Other
- 2401 20 – Tobacco partly or wholly stemmed or stripped
- 2401 20 10 – Flue cured Virginia tobacco
- 2401 20 20 – Sun cured Country (Natu) tobacco
- 2401 20 30 – Sun cured Virginia tobacco
- 2401 20 40 – Burley tobacco
- 2401 20 50 – Tobacco for manufactures of Bidis, not stemmed
- 2401 20 60 – Tobacco for manufactures of Chewing tobacco
- 2401 20 70 – Tobacco for manufactures of cigar and cheroot
- 2401 20 80 – Tobacco for manufactures of Hookah tobacco
- 2401 20 90 – Other.
- The tobacco leaves are supplied/sourced in various stages but all of which there was no change in form of the leaves except some minimal activities done on them to make them marketable.
- The tobacco leaves ion all these stages of trading attract GST rate of 5% only.
- As per the GST tariff both tobacco leaves and unmanufactured tobacco (other than tobacco leaves) fall under the same HSN 2401 and the words are not defined specifically.
- An entry in the tariff has to be read ‘as it is’ following the principle of literal rule of interpretation and the ‘word’, ‘term’ or a ‘phrase’ shall not be read by affixing or suffixing another word to it.
- In the entry the expression ‘tobacco leaves’ is mentioned without any qualifier attached to it viz., ‘dried tobacco leaves’, ‘undried tobacco leaves’, ‘cured tobacco leaves’ etc., In such cases, it cannot be read that tobacco leaves means only those leaves cut from the plants and tobacco leaves on which certain operations are considered will not be tobacco leaves.
- In the absence of the definition it shall be understood in its natural and commercial meaning.
- With reference to the Advance Ruling in re ‘Pragathi Enterprises’ the following commodities will attract only 5% of tax-
- Tobacco leaves in cured form procured from farmers directly in case of Non FCV tobacco and at Tobacco Auction Platforms in case of FCV tobacco.
- Tobacco leaves traded between dealers of tobacco without rendering any further processes, whatsoever.
- Tobacco leaves that are subjected to minimum manual process like grading, butting or redrying, where no physical or chemical changes are happening to these leaves.
- Tobacco leaves that are threshed and redried, where only the tobacco leaves are as such but are in broker form.
The Authority for Advance Ruling observed that as per the Notification No. 04/2017-CGST (Rate), the supply of tobacco leaves shall be under ‘Reverse charge’. Though there are different entries with respect to tobacco there is a specific entry in Schedule I of Notification No. 01/2017-CGST (Rate) as tobacco leaves and for the same the liability was brought under reverse charge mechanism. Hence it is clear that the commodity ‘tobacco leaves’ is distinct from the other entries in this aspect.
The process of tobacco, from the field to final product, the green leaves undergo curing process and become eligible commercial commodity, for which transaction takes places in between the farmer and the trader on the auction program. The applicants purchase the dried leaves on auction platform and trade the same to other dealers or exporters and further engaged in threshing and redrying of tobacco leaves on job work basis for other traders or manufacturers.
The Authority for Advance Ruling has given the following ruling-
- The GST rate of tax for the tobacco leaves procured at tobacco auction platforms or directly from farmers, which are cured and dried by farmers themselves is 5% under reverse charge.
- The rate of tax if the applicant purchases tobacco leaves from other dealers, who have purchased them from farmers for the purpose of trading is 5% as per Sl. No. 109 of Schedule I to Notification No.01/2017-Central Tax (Rate), dated 28.06.2017.
- If the applicants segregate the tobacco into grades depending their size, color/shade, length, texture of the leave etc., and sells such graded tobacco leaf the rate of tax is 5% as per Sl. No. 109 of Schedule I to Notification No.01/2017-Central Tax (Rate), dated 28.06.2017.
- If the tobacco leaves are butted and sold to other dealers the rate of tax is 5% as per Sl. No. 109 of Schedule I to Notification No.01/2017-Central Tax (Rate), dated 28.06.2017.
- If the tobacco leaves are redried without getting threshed the rate of tax is 5% as per Sl. No. 109 of Schedule I to Notification No.01/2017-Central Tax (Rate), dated 28.06.2017.
- If the tobacco leaves are threshed and redried the rate of tax is 28% as per sl. No. 13 of Schedule IV to Notification No.01/2017-Central Tax (Rate), dated 28.06.2017.
- If the tobacco leaves are threshed and redried on job work basis the rate of tax is 28% as per sl. No. 13 of Schedule IV to Notification No.01/2017-Central Tax (Rate), dated 28.06.2017.
