The Hindu Business Line : Grain commission agents exempt from service tax

The move, officials said, makes both political and economic sense. Politically, because arhatiyas are seen as a lobby wielding tremendous clout, especially in Punjab and Haryana. Punjab alone has 25,000-odd arhatiyas, each of them handling foodgrain volumes ranging from 100 to 5,000 tonnes per season.

At one level, the arhatiya represents the nerve centre of the entire grain trade routed through regulated mandis. Under the prevailing system, farmers bring their produce to the market and unload it on the particular yard licensed to an arhatiya by the local mandi committee. The arhatiya gets the grain cleaned first and then organises its auction. Once bidding is completed, the grain is weighed and filled into gunny bags, with the arhatiya also arranging for their stitching prior to loading into the trucks of the buyer concerned.

For all this, the arhatiya receives a `dami' or commission fee, amounting to 2.5 per cent of the auction price offered by the successful bidder. The `dami' is over and above the cleaning/unloading charges or the cost of weighing, filling and stitching, which are separately recovered from the farmer and buyer, respectively.

Thus, the Food Corporation of India (FCI) or even a private trader such as Cargill has to shell out the 2.5 per cent dami, which, on the current Minimum Support Price of Rs 630 per quintal for wheat, works out to Rs 15.75 per quintal. Assuming total official wheat procurement at 20 million tonnes, the extra outgo works out to around Rs 315 crore. A similar amount would be due on paddy as well.

"Levying a service tax on the income of arhatiyas does not make much economic sense because what is gained by way of revenue is lost through higher food subsidy. Since the dami is charged on the MSP, the burden of paying it ultimately devolves on the Centre, which has to reimburse FCI for all its expenses," the officials added.

But then, it is not just FCI that forks out the `dami'. The existing rules prohibit any buyer, Government or private, from buying grain directly from the farmer, which means that the purchases have to be compulsorily routed through the arhatiyas. Moreover, the commission fee is charged not only on foodgrains, but also on other farm produce, including oilseeds and fruits & vegetables (where the `dami' is usually in the 4-5 per cent range). All put together, the agricultural commission agent business would probably exceed Rs 1,500 crore.

The Finance Ministry has clubbed commission agents under the category of persons performing `business auxiliary services', who "cause sale or purchase of goods, on behalf of (other persons) for a consideration which is based on the quantum of such sale or purchase". The Ministry has clarified that the arhatiyas' activity does not fall under the scope of clearing and forwarding agents (C&F) services "and hence would not be liable for service tax under this category". According to the Ministry, there is no relationship of `principal' and `agent' between the farmer and the arhatiya, for the latter to be considered as a C&F agent.

In reality, the arhatiya is not merely a commission agent. He is also a financier, who meets the farmer's credit requirement for the crop season. Financing against assured grain delivery, in turn, helps in generating adequate commission business at harvest time.