Understanding Goods and Services Tax for Agarbatti in India

Agarbatti, commonly known as incense sticks, holds significant cultural importance in India, widely used in both homes and businesses for daily rituals and religious ceremonies. Following the introduction of the Goods and Services Tax (GST) system in India, the taxation framework for agarbatti has undergone standardization. This article provides a comprehensive overview of GST's impact on agarbatti, including its HSN code and applicable GST rates.

The GST law dictates that GST applies to the manufacturing and sale of agarbatti. However, certain exemptions exist. Small-scale businesses with an annual turnover up to Rs. 40 lakhs (or Rs. 20 lakhs in special category states and Telangana) in a financial year are not required to register for GST or pay the tax. GST registration becomes mandatory if the turnover surpasses these threshold limits.

A composition scheme is available for smaller enterprises, allowing them to follow simplified compliances and pay tax at a fixed rate based on their turnover. Eligible agarbatti manufacturers whose annual turnover is up to Rs. 1.5 crore (or Rs. 75 lakhs for special category states and Himachal Pradesh) can opt into this scheme, paying a reduced GST rate of 1% on their turnover. This rate is substantially lower than the standard 12% GST rate. However, businesses under the composition scheme cannot avail Input Tax Credit (ITC) and are prohibited from making interstate supplies.

Additional considerations regarding agarbatti taxation under GST include:

Invoicing

Under GST, all registered taxpayers must issue an invoice for every supply of goods or services. The invoice needs to include specific details such as the supplier's and recipient's names, addresses, and GSTINs, a description of the goods, their quantity and value, and the total amount charged.

It is also crucial to accurately state the Harmonized System of Nomenclature (HSN) code—a four or six-digit classification code for taxation—and the correct GST rate. Ensuring all these details are correct on the invoice is vital for GST compliance and avoiding potential penalties.

Place of Supply

GST operates as a destination-based tax, meaning goods and services are taxed where they are consumed. Consequently, if agarbatti is purchased from another state, the GST will be levied based on the location where the goods are ultimately delivered.

Transportation and e-Way Bills

The GST law mandates e-way bills for transporting goods exceeding Rs. 50,000 in value (per invoice/bill/delivery challan), whether within a state or across state lines. These bills facilitate tracking goods movement and ensuring tax payments. Agarbatti manufacturers must generate e-way bills when necessary to prevent penalties.

GST Rate and HSN Code for Agarbatti

The HSN code for agarbatti is 33074100, and the GST rate is 5%. Similarly, dhoop agarbatti is also subject to a 5% GST rate.

The following table outlines the GST rates and HSN codes for various products related to agarbatti manufacturing:

ITC Availability on Agarbatti

Input Tax Credit (ITC) allows businesses to claim credit for GST paid on goods or services utilized in their operations. Agarbatti manufacturers can claim ITC on taxes paid for raw materials like bamboo sticks, charcoal, and perfumes. However, several conditions must be met to claim ITC:

• The inputs must be used exclusively for business activities, not personal use.
• The business must possess a valid tax invoice or debit note from the supplier.
• The goods or services for which ITC is claimed must have been received by the business. Credit can only be claimed after receiving the final installment of goods.
• Payment to the supplier must be made within 180 days of the invoice date; otherwise, ITC claims must be reversed with interest, reclaimable upon payment.
• The supplier must have filed the tax invoice or debit note in Form GSTR-1, and it must reflect in the buyer's Form GSTR-2B.
• ITC on a tax invoice or debit note must be claimed within the specified time limit under GST provisions.
• ITC is not allowed if depreciation has been claimed on the tax component of capital goods.
• If purchases are used for both taxable and exempt supplies, or for both business and non-business purposes, the input tax credit must be accurately identified and apportioned.
• The ITC must be claimed by November 30th of the subsequent financial year or the date of filing the annual GST return, whichever is earlier.
• The ITC must not fall under Section 17(5) of the CGST Act, which outlines blocked credits.

Meeting these criteria allows businesses to claim ITC on the GST paid for agarbatti-related purchases, thereby reducing their overall tax liability.

Advance Rulings Related to GST on Agarbatti

Advance Rulings on GST are determinations made by the Authority for Advance Rulings (AAR) or the Appellate Authority for Advance Rulings (AAAR) regarding specific issues of a business's GST tax obligations. These rulings provide clarity on tax liability and are binding on both the applicant business and tax authorities.

One pertinent case involved M/s Moksh Agarbatti Co., which sought an advance ruling from the Gujarat GST AAR regarding the taxability of agarbatti. The taxpayer provided one unit of dhoop free with every pack (10 pieces) of agarbatti. The company sought clarification on whether it could claim ITC on the GST paid for manufacturing the dhoop and on purchasing dhoop from a third-party vendor.

The Gujarat GST AAR ruled that the taxpayer could not claim ITC on the GST paid for inputs used in manufacturing the dhoop or on purchasing dhoop from a third-party vendor. This decision was based on Section 17(5)(h) of the CGST Act, 2017, which disallows ITC for goods that are lost, stolen, destroyed, written off, or given as a gift or free sample. Since the dhoop included with the agarbatti pack was considered a free sample, no ITC was permitted.

In the same advance ruling, a clarification was also requested on whether ITC could be claimed on the insurance and maintenance of motor vehicles purchased for transporting directors and employees.

The Gujarat AAR again ruled against allowing ITC. Section 17(5)(ab) specifies that ITC cannot be claimed on general insurance, servicing, repair, and maintenance services related to motor vehicles, vessels, or aircraft referred to in clause (a) or clause (aa). Clause (a) includes motor vehicles used for passenger transport with an approved seating capacity of up to 13 persons, including the driver.

Conclusion

The implementation of GST has profoundly affected the agarbatti industry. Before GST, agarbatti was subject to multiple taxes, including excise duty, Value-Added Tax (VAT), and Central Sales Tax (CST). GST has consolidated these taxes, streamlining the tax structure and lessening the compliance burden for manufacturers.

It is imperative for businesses to grasp the GST system and its implications for agarbatti to prevent potential penalties or disputes.

FAQs on GST on Agarbatti:

• What is the HSN code for agarbatti under GST? The HSN code for agarbatti is 33074100.
• Are there any restrictions on agarbatti manufacturers claiming Input Tax Credit (ITC)? Yes, ITC can only be claimed on inputs like raw materials, packaging, and machinery used in agarbatti production. ITC is disallowed for goods or services intended for personal consumption.
• Does agarbatti receive any GST exemption? Yes, small businesses with an annual turnover up to Rs. 40 lakhs (or Rs. 20 lakhs in special category states and Telangana) in a financial year are exempt from GST registration and payment.
• Is GST applicable to the packaging materials used for agarbatti? Yes, GST applies to packaging materials used in agarbatti production. The specific GST rate depends on the type of packaging material utilized.