The Kerala Authority of Advance Ruling (AAR) bench of Sreeparvathy S.L. and Abraham Renn S. has ruled that GST is payable on fair trade premium, which forms part of the consideration and value of a taxable supply of goods.The applicant, M/s Fair Trade Alliance Kerala, was formed in 2006 and is an association of over 4000 small-holder farmers in North Kerala. Fair Trade is an...
The Kerala Authority of Advance Ruling (AAR) bench of Sreeparvathy S.L. and Abraham Renn S. has ruled that GST is payable on fair trade premium, which forms part of the consideration and value of a taxable supply of goods.
The applicant, M/s Fair Trade Alliance Kerala, was formed in 2006 and is an association of over 4000 small-holder farmers in North Kerala. Fair Trade is an organised social movement and a market-based approach that aims to help producers in developing countries obtain better trading conditions and promote sustainability. Generally, farmers and workers at the beginning of the chain do not always get a fair share of the benefits of trade.
The system of Fair Trade ensures that the farmers who are at the beginning point of the supply chain are adequately compensated as being part of the Fair Trade community. The concept of fair trade has been in vogue as early as the 1970s, but it assumed a structured and organised format governed by standards and certifications in the 1990s.
Fair Trade operates mainly on the principles of: opportunities for disadvantaged producers; transparency and accountability; fair trade practices; fair payment; no child labour, no forced labour; no discrimination; gender equity, freedom of association; good working conditions; capacity building; promoting fair trade; and respect for the environment. The goals are achieved through the active contribution and participation of Fair Trade enterprises involved in every limb of the production/supply chain.
The Fair Trade premium is available in particular for exports from developing countries to developed countries, most notably for coconut, cashew, spices, coffee, cocoa, sugar, tea, bananas, honey, cotton, wine, fresh fruit, nuts, handicrafts, etc. The Fairtrade premium is calculated as a percentage of the volume of produce sold. The amount of premium that farmers receive differs from product to product and across regions. The price is reviewed every three to four years by the regulatory bodies to adjust for local inflation.
The applicant has sought an advance ruling on the issue of whether the applicant, an association of farmers, engaged in the supply of agricultural produce through the concept of fair trade, is liable to pay GST on components of the "Fair Trade Premium".
Yet another issue raised was whether the component of "Fair Trade Premium" constitutes consideration or additional consideration for the supply of goods made by the applicant.
As per Section 15(1) of the CGST Act, the value of a supply of goods or services or both shall be the transaction value, which is defined as the price actually paid or payable for the said supply of goods or services, or both, where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply. Sub-sections (2) and (3) of Section 15 list out the inclusions and exclusions from the value of supply.
The applicant submitted that the starting point of the transaction is the procurement of agricultural produce from the farmers. The goods are procured by the applicant from farmers at the fair trade minimum price, i.e., as per the price applicable to products involved in the fair trade scheme. According to the applicant, the price paid is almost invariably above the market price. The second stage of the transaction is that the goods procured in the first stage are sold in aggregate to the buyer/exporter by the applicant. As per the applicant, the amount at which the buyer/exporter is purchasing is also above the market value. The buyer/exporter is further exporting the products by raising an invoice to the buyer abroad for a price that is inclusive of the Fair Trade Premium at the percentage prescribed for each product.
The AAR observed that any payment made or to be made in respect of or in response to the inducement of supply of goods or services or both forms part of the consideration and should form part of the value of taxable supply. The definition of the term "consideration" is inclusive, which means it not only includes the payment received by the supplier in relation to the supply from the recipient but also from any other person. The Fair Trade Premium is calculated as a percentage of the volume of produce sold. The amount of premium that farmers receive differs from product to product and across regions. The statement of facts in the instant case reveals that the applicant receives the fair trade premium from the recipient of supply itself, and that the fair trade premium has a clear nexus with the supply of goods, as it is calculated as a prescribed percentage of the volume/quantity of each product/commodity sold, and collected from the ultimate consumer as a component of the price of the product itself.
The AAR noted that the fair trade premium received by the applicant was nothing but part of the price that was actually paid/received in response to the supply of the goods made by the applicant and invariably constitutes an additional consideration received in respect of the supply of goods and is to be added to the taxable value of the respective goods supplied and liable to GST at the same rate as applicable to the goods supplied.
The AAR held that the Fair Trade Premium forms part of the consideration and value of the taxable supply of the goods supplied, and the applicant is liable to pay GST at the same rate as the applicable rate to the respective goods supplied. The Fair Trade Premium forms part of the consideration for the goods supplied.
Applicant's Name: Fair Trade Alliance Kerala
Citation: Advance Ruling No. Ker/134/2021
Dated: 18/02/2022