Impact of GST on the Agricultural Sector in India

The agricultural sector has always been the backbone of India’s economy—feeding the nation, employing millions, and sustaining rural livelihoods. When the Goods & Services Tax (GST) was introduced on July 1, 2017, it brought in sweeping reforms to many sectors; agriculture was no exception. While GST aimed to simplify and unify indirect taxation, its effects on farming, agri-inputs, machinery and the value chain have been mixed. Below, I explore both the positives and the challenges, and what they mean for different stakeholders.

What GST Does — Key Features Relevant to Agriculture

Before looking at impacts, it helps to understand some of the features of GST that are particularly relevant:

1. Uniform Indirect Tax System – GST replaced multiple indirect taxes (like VAT, excise, service tax, octroi, etc.) with a single tax system. This simplifies interstate trade and reduces tax cascading.
   
   
2. Exemptions and Zero-Rated Goods – Many raw agricultural products are either exempt or zero-rated under GST. This means primary produce often doesn’t incur GST.
   
   
3. Differential Rates for Processing & Value Addition – If agricultural products are processed, branded, packaged, or have value added (e.g. dairy, processed foods), GST applies at different slabs depending on how much processing.
   
   
4. Input Tax Credit (ITC) – Entities registered under GST can claim credit for the GST paid on inputs (inputs include raw materials, certain machinery etc.), reducing the effective cost of production. However, those selling exempt or non-taxable goods often cannot claim ITC.

Positive Impacts of GST on Agriculture

GST has brought several advantages to the agricultural ecosystem:

1. Reduction of Tax Cascading
   Before GST, agricultural inputs or goods often faced multiple overlapping taxes (for example VAT + state taxes + local taxes + octroi). This increased costs especially in moving products across state borders. Post-GST, many redundant taxes have been removed, making trade across states smoother and less costly.
   
   
2. More Transparent Supply Chains
   With unified tax documentation (GST invoices, e-way bills, etc.), there is more visibility in the supply chain. That tends to reduce leakages, reduce arbitrages between states, and discourage tax evasion or complexity in moving agri goods.
   
   
3. Encouraging Processed and Branded Products
   Since raw produce is mostly exempt, but there is taxation on processed/packaged agricultural products, there is an incentive for adding value (e.g. packaging, processing) to farm output. This can lead to better profits for farmers or agribusinesses that can build brands around their products.
   
   
4. Easier Interstate Trade
   Removal of state-level entry taxes, reduction in multiple tax rates, and implementation of e-way bills help in transporting agricultural produce more efficiently from one state to another. This helps both in terms of signal for market access and in reducing wastage (e.g., perishable goods).
   
   
5. Simplified Tax Compliance for Many
   For many small farmers who deal only with raw produce, the burden of GST compliance is minimal since there is exemption. For larger players / processors, the unified tax system is simpler than multiple overlapping state and local taxes.

Challenges & Concerns Under GST for Agriculture

While there are benefits, GST also poses certain challenges and raises issues in practice:

1. Input‐Cost Inflation for Certain Inputs & Machinery
   Though many inputs are exempt or taxed at lower GST rates, some farm machinery, pesticides, chemicals, and packaging materials face higher GST rates (12%-18% or more). For farmers who must buy these, the cost of production may increase.
   
   
2. Limited Access to Input Tax Credit (ITC)
   Only businesses registered under GST can claim ITC, and only for inputs that are not exempt. A major portion of small, marginal farmers are not registered or do not have formal documentation; thus, they cannot avail the benefit of ITC. Also, as raw produce is often exempt, those selling exempt goods don’t get ITC.
   
   
3. Complexity & Compliance Burden for Smaller Players
   For agribusinesses which do processing, packaging, branding etc., navigating GST slabs, HSN codes, return filings, invoices etc can be a burden. For small/remote operators, lack of awareness or lack of infrastructure (internet, accounting support) may make compliance harder.
   
   
4. Tax on Value-Added Products Means Differential Treatment
   As soon as value is added, GST comes in, which can make processed foods or packaged produce significantly more expensive to consumers; this might limit markets for such products depending on consumer purchasing power.
   
   
5. Rate Ambiguities & Frequent Changes
   Over time, GST rates on various agricultural inputs or machinery may change because of GST Council decisions. These changes can lead to uncertainty for farmers/planners. For example, reductions or increases in rates on certain machinery or inputs happen, impacting investment decisions.

Recent Changes & Case-in-Point (as of 2025)

To understand more concretely, some recent decisions and outcomes are illustrative:

• The 56th GST Council meeting announced reductions in rates for many agricultural machines (e.g. fixed-speed diesel engines, certain sprinklers, hand pumps, tractors with engine capacity ≤ 1800 cc) reducing from 12% to 5%. This signals a policy intent to reduce GST burden on certain machinery.
  
  
• Also machinery like harvesting machines, composting machines, self-loading trailers etc got rate reductions.
  
  Here are the rate changes for agricultural machinery (including harvesting machines, composting machines etc.) after the 56th GST Council meeting:
  
  

• Items such as harvesting or threshing machinery, composting machines, self-loading/unloading trailers for farming, etc., which earlier attracted 12% GST, have been reduced to 5%. 
• More broadly, a number of agricultural and farm-machinery items and parts which were at 18% have also been brought down to 5%.

These moves aim to lower the input costs, especially capital inputs, which are crucial for improving farm productivity and adopting modern technology.

Who Gains & Who Might Be Disadvantaged‍

It’s useful to see the stakeholders and how they are differently affected:

Overall Assessment

GST has been a significant step toward simplifying the tax landscape for agriculture in India. It has especially helped in:

• Unifying markets and removing cross-state tax barriers
  
  
• Eliminating multiple levels of tax that used to distort prices and increase cost of trade
  
  
• Encouraging formalization of parts of the supply chain

However, for its benefits to be fully realized, certain things need attention:

1. Ensuring small farmers have access to formal supply chains and documentation to benefit indirectly (even if they remain unregistered).
   
   
2. Clarity & stability in GST rates for agricultural inputs and machinery flip-flopping rates make planning hard.
   
   
3. Better outreach, awareness and support for compliance for small/medium agribusinesses.
   
   
4. Infrastructure support (cold chains, storage, transport) to reduce wastage, which in combination with GST improvements can improve profitability.

Conclusion

In conclusion, GST has generally been a force for good in the agricultural sector of India by making taxation more transparent, reducing redundant levies, and encouraging value addition. The decision to exempt raw produce has protected farmers from immediate tax burdens, while recent rate reductions on machinery and farm-equipment show that policy is responsive to farmers’ needs. Yet, challenges remain – especially for smaller farmers and those at early stages of the value chain. With careful tuning of rates, effective implementation, and supportive infrastructure, GST can contribute significantly to boosting agricultural productivity, incomes, and sustainability.