Impact of GST on Agricultural Products and Services

India’s agriculture sector – the backbone of its economy, supporting over 42% of the population and contributing around 18.2% to GDP – has always received special treatment under tax law. When the Goods and Services Tax (GST) came into force on 1st July 2017, it didn’t just change the tax structure for businesses and services – it fundamentally reshaped how agricultural produce is taxed, traded, and processed across the country. For anyone running or building a farm-based business, understanding how GST applies to raw produce, value-added products, and agricultural services isn’t optional – it’s essential.

What GST replaced and why it mattered for agriculture 🔗

Before GST, the agricultural supply chain was fragmented by a web of state-level taxes – Central Sales Tax (CST), octroi, purchase tax, and varying state VAT rates. Moving a truckload of onions from Maharashtra to West Bengal meant navigating multiple tax checkpoints and compliance requirements. Each state had its own rules, and taxes were often levied on taxes already paid – a problem known as tax cascading.

GST eliminated these state-level taxes such as CST and octroi, replacing them with a single unified system governed by the Central Goods and Services Tax (CGST) Act, 2017. This dramatically simplified interstate trade. The introduction of the e-way bill replaced stacks of state-specific permits, and logistics costs for agricultural commodities dropped. Moving agricultural goods across states has become 20-30% cheaper under this streamlined framework, benefiting farmers who can now access more distant markets competitively.

GST on basic agricultural produce: what’s exempt and why 🔗

The cornerstone of agricultural GST policy is a broad exemption on unprocessed, primary produce. Unprocessed agricultural produce such as fresh fruits, vegetables, grains, pulses, and milk continue to remain exempt from GST. This exemption is a deliberate policy choice – keeping essential food items affordable for consumers while protecting farmers from taxation on their primary output.

The exemption is defined carefully under the law. Agricultural produce is defined as produce from cultivation or rearing on which either no further processing is done, or only such processing as is usually done by a cultivator that does not alter its essential characteristics and only makes it marketable for the primary market. This means basic farm-level operations – sorting, cleaning, drying, grading, sun-drying, bulk packaging – don’t attract GST, as long as they don’t change the fundamental nature of the produce.

Importantly, both seeds and fertilisers, which are major inputs for agriculturists and farmers, are exempt from GST or attract lower rates, ensuring that the cost of growing the crop itself is not burdened by taxation. The 56th GST Council meeting (effective September 22, 2025) went further – GST on tractors was reduced to 5%, and tractor tyres and parts, drip irrigation systems, sprinklers, and bio-pesticides all saw rate cuts from 12-18% to 5%. These reforms directly reduce input costs and make mechanised farming more accessible.

The pre-packaging threshold 🔗

One practical update that affects farm businesses is the pre-packaging rule. Under CBIC Notification No. 02/2024 dated July 12, 2024, agricultural farm produce in packages exceeding 25 kilograms or 25 litres is not considered “pre-packaged and labelled” and therefore remains exempt from GST. This matters significantly for bulk sellers and farmer producer organisations (FPOs) who supply wholesale quantities – they are not drawn into the GST net simply because their goods are packaged.

GST on value-added and processed agricultural products 🔗

The picture changes once agricultural produce is processed, branded, or packaged for retail. Raw produce is exempt from GST, while processed goods may attract rates of 5%, 12%, or 18%, depending on the level of processing and packaging. This tiered structure reflects the degree of value addition involved at each stage.

5% GST slab – minimal processing 🔗

Products that undergo light processing but retain their essential agricultural character fall into the 5% bracket. Frozen peas, spinach, mixed vegetables, and frozen fruits fall under the 5% GST slab, as do dried vegetables such as dried onions, garlic flakes, and dried mushrooms. Sugar, edible oils, and UHT-processed milk also attract 5% GST. The rationale is that while these items require some processing infrastructure, they are still close to their natural form and remain accessible staples.

12% GST slab – branded and packaged products 🔗

Branded and packaged items – including dry fruits, butter, packaged paneer, and ghee – are subject to 12% GST. These products represent a meaningful degree of value addition: branding, standardisation, and quality assurance are involved. For agripreneurs building packaged food brands, this is the slab most relevant to product pricing and margins.

18% GST slab – highly processed products 🔗

Products such as sauces, jams, pickles, and packaged snacks, which involve higher levels of processing and packaging, are taxed at 18% GST. This higher rate reflects the full value-addition pipeline: raw input procurement, processing, preservative use, branding, and retail packaging. Services related to food processing and machinery – such as refrigeration equipment for cold storage and vehicles used for preservation and transport of agricultural produce – attract 18% GST as well, which is an important cost consideration for food processing businesses.

GST on agricultural services 🔗

Not just goods – services connected to agriculture also have a defined GST treatment. Agricultural services directly related to cultivation, harvesting, threshing, plant protection, or testing of soil and seeds are exempt from GST. Services such as warehousing of agricultural produce, renting or leasing of agro-machinery, and loading, unloading, packing, and storage are also exempt.

However, not all services escape GST. Commission earned by agents or brokers for selling agricultural products is taxable at 18% GST. This is an important distinction for agribusinesses that use intermediaries or trade through APMC (Agricultural Produce Market Committee) channels. Similarly, inter-state sales of notified agricultural produce through a commission agent attract a concessional IGST rate of 2.5%.

Input Tax Credit (ITC): the real advantage for registered agri-businesses 🔗

One of the most strategically significant aspects of GST for agricultural enterprises is the Input Tax Credit (ITC) mechanism. ITC allows a registered business to claim credit for the GST paid on inputs – seeds, fertilisers, machinery, packaging material – and use it to offset GST payable on outputs.

The availability of input tax credits under GST has lowered the cost of agricultural inputs and improved profitability for farmers and agricultural enterprises. For example, a food processing company that pays 5% GST on raw material (say, frozen vegetables) and 18% GST on packaging equipment can claim credit for both while computing its output GST liability. This prevents tax cascading and reduces the effective cost of production.

There is, however, a critical limitation. Farmers selling exempt produce cannot claim ITC – because there is no output tax to offset the credit against. This means small and marginal farmers who grow and sell only raw produce remain outside the ITC benefit even if they purchase taxable inputs like pesticides or power-driven machinery. Even agricultural producers exceeding the annual turnover threshold of Rs. 40 lakhs are not mandated to register under GST, though voluntary registration is an option for those who wish to avail ITC.

Unified national market and supply chain benefits 🔗

Beyond taxation rates, GST has had a structural impact on how agricultural markets function. GST paves the way for a smoother and more transparent supply chain, with traders gaining the advantage of input tax credit and minimised tax burdens at each stage of value addition. This supports the National Agricultural Market (eNAM) initiative – an online trading platform that connects farmers and buyers across state-regulated markets – by removing the state-specific tax barriers that previously complicated interstate agricultural trade.

With unified tax documentation – GST invoices and e-way bills – there is more visibility in the supply chain, which reduces leakages, limits arbitrage between states, and discourages tax evasion in the movement of agricultural goods. For perishable commodities, the elimination of long waits at state border checkpoints directly reduces spoilage and post-harvest losses, improving net farmer income.

Challenges that remain 🔗

GST has delivered real benefits for organised agri-businesses, but challenges persist for smaller players. While most agricultural inputs are exempt or taxed at lower rates, machinery and pesticides are taxed at 12% and 18% respectively, increasing the burden on farmers – particularly those who cannot claim ITC against their exempt produce sales.

Compliance is another issue. Smaller farmers unregistered under GST continue to face challenges – their inability to avail of ITC on inputs can be a concern for those buying from registered traders. Many farmers in rural India also lack awareness of GST rules, exemptions, and filing requirements. Without adequate guidance, even eligible benefits go unclaimed. The complexity of determining whether a product qualifies as “agricultural produce” or a “processed good” – and therefore which rate applies – remains a source of uncertainty, particularly for products that undergo moderate processing like turmeric, cumin, or groundnuts.

The Government of India announced revised GST rates effective September 22, 2025, with the stated purpose of making food more affordable, encouraging healthier choices, and promoting economic growth. Repeated revisions, while broadly positive, also signal that businesses must stay updated – rate changes directly affect product pricing, input cost calculations, and ITC eligibility.

What this means for agripreneurs 🔗

For someone building an agriculture-based business – whether as a farmer selling directly, a food processor, or an agri-startup – the GST framework presents both a clear structure and a set of strategic decisions. Selling raw, unprocessed produce? You’re largely outside the GST net. Moving into branded, packaged, or processed products? GST becomes a central cost and compliance factor.

The key takeaway is that the more value you add, the more GST applies – but also, the more ITC you can potentially claim. A well-structured agri-business that is registered under GST, tracks its input costs carefully, and prices its processed products with GST margins in mind can actually use the ITC mechanism to offset a significant portion of its tax burden. The GST rationalisation in agriculture is widely viewed as a farmer-friendly and pro-sustainability reform – lowering costs for farmers, boosting cooperatives and FPOs, and strengthening food security.

What do you think? As agricultural businesses move further into value addition and food processing, does the current GST structure create enough incentive to formalise and scale – or do compliance burdens still outweigh the benefits for small and marginal farmers? And with rate revisions continuing well into 2025, how should agripreneurs plan their product and pricing strategies to stay ahead of GST changes?

References

1. https://www.taxscan.in/top-stories/gst-registration-in-agriculture-when-section-23-saves-you-1443706
2. https://cleartax.in/s/impact-of-gst-on-agricultural-sector
3. https://www.mygstrefund.com/blog/GST-AND-AGRICULTURE
4. https://www.bajajfinservmarkets.in/discover/gst-on-agriculture-products
5. https://www.taxtmi.com/article/detailed?id=12509
6. https://www.indiafilings.com/learn/agriculture-under-gst/
7. https://blog.saginfotech.com/cbic-notification-no-2-2024-exempts-gst-agricultural-produce-exceeding-25-kg-25-litres
8. https://www.kanakkupillai.com/learn/hsn-code-and-gst-rate-for-vegetables-and-fruits-in-india/
9. https://www.mofpi.gov.in/sites/default/files/services_wise_gst.pdf
10. https://www.bajajfinserv.in/gst-on-agricultural-products
11. https://piceapp.com/blogs/impact-of-gst-on-agriculture/
12. https://authbridge.com/knowledge-centre/insights/gst-agriculture-tax-compliance
13. https://vakilsearch.com/blog/agriculture-under-gst-registration-requirement-gst-rates/
14. https://www.cashflo.io/magazine/impact-of-gst-on-the-agricultural-sector-in-india
15. https://www.fas.usda.gov/data/india-india-announces-new-goods-and-services-tax-rates
16. https://www.pib.gov.in/PressReleasePage.aspx?PRID=2164904