Rice Millers & Paddy Traders Tax & GST Rules Guide

In the agricultural belt stretching from Kalahandi and Koraput in Odisha to Dhamtari, Balod, and the industrial clusters of Urla and Bhanpuri in Raipur, rice milling is not just an industry—it is the financial engine of the region. Every kharif and rabi season, hundreds of modern parboiled and raw rice mills process millions of quintals of paddy procured from farmers and state nodal agencies.

However, operating a rice mill or paddy trading firm involves navigating one of the most complex tax and regulatory environments in Indian commercial law. Millers frequently manage a dual business model: processing Custom Milled Rice (CMR) on job work for government procurement agencies like the Odisha State Civil Supplies Corporation (OSCSC) or Chhattisgarh State Cooperative Marketing Federation (MARKFED), while simultaneously purchasing paddy from open mandis for commercial rice production.

This dual structure creates real audit risk under GST, income tax and mandi laws. Common triggers for departmental notices include misclassified job-work billing, incorrect apportionment of Input Tax Credit (ITC), cash disallowances under Section 40A(3), outturn-ratio shortfalls and misapplied withholding-tax provisions.

This guide sets out the compliance framework for rice millers and paddy traders across Chhattisgarh and Odisha.

Which Act applies? References to income tax sections are to the Income-tax Act, 1961, which governs years up to FY 2025-26. From 1 April 2026 the Income-tax Act, 2025 applies; TDS on purchase of goods (old Section 194Q) now sits in the TDS table in Section 393 of the new Act.

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Rice Mill Procurement, Custom Milling & Tax Workflow

The process matrix below outlines the dual procurement channels, operational stages, and applicable tax checkpoints for rice milling operations:

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1. Custom Milled Rice (CMR) vs. Commercial Rice Milling Tax Matrix

Understanding the legal distinction between Custom Milled Rice (CMR) and commercial milling is essential for correct invoicing and tax return filing.

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2. GST Compliance on Custom Milling (CMR) & By-Products

A. Milling Charges & SAC Code Classification

When a mill in Jayapatna or Dhamtari processes paddy owned by OSCSC or MARKFED, the miller provides a Job Work service.

• Applicable GST Rate: 5% (2.5% CGST + 2.5% SGST or 5% IGST).
• Service Accounting Code: SAC 9988 (Services provided by way of job work in relation to food and food products).
• Taxable Value: Milling charges prescribed by the government agency (e.g., ₹20 to ₹120 per quintal depending on state parboiling subsidies and bonus rates).

Crucial Audit Warning: Millers must never bill CMR processing as a sale of rice under HSN 1006. Invoicing CMR output as a commodity sale distorts GSTR-1 data, triggers turnover mismatches between GSTR-3B and Income Tax ITR-6/3CD, and leads to demand notices from GST enforcement wings.

B. Taxability and Valuation of Retained By-Products

Under standard state procurement agreements, government agencies pay modest milling charges. To compensate the miller, state contracts allow millers to retain by-products generated during milling:

1. Rice Bran (HSN 2302): Essential raw material for solvent extraction plants in Raipur and Durg. It attracts 5% GST. When millers sell retained bran to oil mills, GST must be charged at 5% and reported in GSTR-1.
2. Broken Rice (HSN 1006): Generated at 1% to 5% of total volume. Taxable at 5% GST if packaged and labeled; exempt if sold loose in unbranded bulk bags.
3. Rice Husk / Paddy Chaff (HSN 1211/2302): Used as biomass fuel for boilers. It is exempt (0% GST).

The Retained By-Product Valuation Dispute

GST auditors in Odisha and Chhattisgarh frequently argue that the market value of retained by-products represents "non-monetary consideration" flowing from the government to the miller under Section 15 of the CGST Act. Officers have issued notices demanding 5% GST on the market value of retained bran and husk as part of job work charges.

The usual line of defence: Where milling rates are fixed by statutory notifications or state policy, and the retention of by-products is built into the official economic cost sheet approved by the Ministry of Consumer Affairs, Food and Public Distribution, artificial addition of by-product value to job work charges is legally unsustainable. However, millers must ensure that every single quintal of retained bran or broken rice sold in the open market is fully backed by tax invoices and reflected in GSTR-3B.

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3. TDS on Purchase of Goods (Section 194Q) — and the End of TCS under Section 206C(1H)

A. TCS under Section 206C(1H) no longer applies

Until 31 March 2025, a seller with turnover above ₹10 crore had to collect 0.1% TCS on sale consideration above ₹50 lakh received from one buyer. The Finance Act, 2025 omitted Section 206C(1H) with effect from 1 April 2025, so millers no longer collect TCS on ordinary sales of rice or by-products. Older years may still come up in tax audits or reconciliations, but no fresh TCS arises.

B. Section 194Q — TDS by the buyer

Section 194Q continues. A buyer whose turnover exceeded ₹10 crore in the preceding financial year must deduct TDS at 0.1% on purchases from a resident seller to the extent the aggregate value in the year exceeds ₹50 lakh. If the seller has not furnished a PAN, the rate is 5% (Section 206AA).

For a rice miller this works in two directions:

• As a buyer — a miller with turnover above ₹10 crore deducts TDS on paddy or other goods bought from a single seller beyond ₹50 lakh in the year.
• As a seller — a wholesaler buying more than ₹50 lakh of rice from the mill, with turnover above ₹10 crore, deducts TDS from its payments to the mill. The mill claims credit for this TDS through Form 26AS / AIS.

C. Transactions with OSCSC, MARKFED and other State agencies

Under the custom-milling arrangement, the paddy remains the agency's property and the miller is paid milling charges. That is a payment for work, not a purchase of goods, so withholding tax (where the agency deducts it) falls under Section 194C, and Section 194Q does not apply to it — Section 194Q(5) excludes transactions on which tax is deductible under any other provision.

Track purchases party-wise each month so the ₹50 lakh threshold is not crossed unnoticed, and keep agency agreements and delivery challans on file to support the job-work treatment of CMR.

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4. Section 40A(3) Cash Purchase Exceptions for Paddy: Rule 6DD(e)

To keep commercial rice mills operating during peak harvest seasons in Balod, Dhamtari, or Kalahandi, millers often purchase raw paddy directly from village farmers at procurement yards or farm gates.

A. The General Rule of Section 40A(3)

Section 40A(3) of the Income Tax Act disallows any business expenditure for which payment exceeding ₹10,000 in a single day to a single person is made otherwise than by an account payee cheque, bank draft, or electronic clearing system (RTGS/NEFT/UPI).

If a rice mill buys ₹30,00,000 worth of paddy in cash from a single seller in a day, the entire ₹30,00,000 can be added back to business income during Tax Audit u/s 44AB, creating a massive tax liability.

B. The Rule 6DD(e) Exemption for Primary Agricultural Producers

Recognizing the rural banking infrastructure constraints in agrarian belts like Jayapatna, Junagarh, and Kanker, Rule 6DD(e) of the Income Tax Rules provides a specific exception:

Rule 6DD(e) Exception: No disallowance under Section 40A(3) shall be made where payment is made for the purchase of agricultural produce to the cultivator, grower, or producer of such produce.

C. Mandatory Documentary Proof Required for Tax Audit

Tax auditors will not accept verbal assertions that cash payments were made to farmers. During the tax audit under Section 44AB, each cash paddy purchase voucher should be supported by:

1. Name, Address, and Aadhaar/Voter ID of the farmer.
2. Khasra / B1 / Khatoni Copy showing agricultural land ownership or cultivation rights.
3. Signed or Thumb-Imprinted Purchase Voucher stating quantity (in quintals), rate per quintal, total consideration, and date.
4. Mandi Gate Pass / Weighment Slip from the weighing bridge (Dharam Kanta).

Critical Warning on Intermediaries: Rule 6DD(e) applies only to direct primary producers (farmers). If a rice mill purchases paddy in cash from a village aggregator, trader, broker, or Kachha Arhtiya who is not the actual cultivator, Rule 6DD(e) DOES NOT APPLY. The entire cash purchase will be disallowed under Section 40A(3). Payments to intermediaries must always be executed through banking channels.

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5. Outturn Ratio Audit & Stock Reconciliation (Raw 67% vs. Parboiled 68%)

Quantitative stock reconciliation is the focal point of every Tax Audit under Section 44AB (Clause 35 of Form 3CD) and GST Scrutiny Audit under Section 61.

A. Mandatory Technical Milling Outturn Ratios

The Food Corporation of India (FCI), OSCSC, and Chhattisgarh State Civil Supplies Corporation prescribe statutory minimum recovery ratios (outturn ratios) for converting paddy into rice:

• Raw Rice Milling: Minimum 67 kg of rice per 100 kg of paddy (67% outturn ratio).
• Parboiled Rice (Ushna Rice) Milling: Minimum 68 kg of rice per 100 kg of paddy (68% outturn ratio).

B. Audit Scrutiny & Clandestine Removal Allegations

If a mill's financial accounts show an outturn ratio lower than 67% (e.g., 63% or 64%), tax authorities immediately raise red flags:

1. GST Department: Officers allege that the missing 3% to 4% of rice was manufactured and sold in cash without issuing tax invoices, creating a demand for unpaid GST plus 100% penalty and interest.
2. Income Tax Department: Assessing Officers may reject the books under Section 145(3) and treat the yield shortfall as unrecorded sales, adding an estimated profit to business income.

C. Defending Legitimate Outturn Shortfalls

Yield variations do occur in actual mill operations due to technical and environmental factors:

• Excess Moisture Content: Paddy procured early in the kharif season often contains 18% to 22% moisture compared to the standard 14% norm. Drying reduces total weight.
• Paddy Variety: Fine varieties (e.g., Sonam, HMT, Swarna) yield higher broken percentage than coarse varieties (e.g., IR-64, Maha Maya).
• Quality of Paddy: High percentage of damaged, discolored, or immature grains.

Practitioner Recommendation: Millers must maintain a daily Milling & Moisture Log Register (Form-C). When moisture loss exceeds standard limits, test reports signed by the mill supervisor must be logged on the day of milling. This daily record provides defensive evidence during GST audits and Income Tax assessments.

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6. Mandi Cess & Krishi Upaj Mandi Shulkh Accounting

In both Chhattisgarh (under the CG Krishi Upaj Mandi Adhiniyam) and Odisha (under the APMC framework), purchasing paddy attracts Mandi Cess (typically ranging between 1% and 2% plus Nirashrit Shulkh where applicable).

A. Income Tax Deductibility u/s 43B

Mandi Cess is a statutory liability levied by state government market committees. Under Section 43B of the Income Tax Act, statutory fees, taxes, and cesses are deductible as business expenditure only in the financial year in which they are actually paid, on or before the due date for filing the Income Tax Return u/s 139(1).

If a rice miller accrues ₹15,00,000 in Mandi Cess for FY 2025-26 but fails to deposit the amount with the Mandi Samiti before the ITR filing deadline, the entire unpaid amount will be added back to taxable income under Section 43B.

B. Accounting Treatment

Record mandi cess as a separate expense rather than folding it into the purchase price of paddy:

Keeping it in its own ledger makes it easy for the tax auditor to report statutory dues and their payment dates under Clause 26 of Form 3CD.

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Monthly Compliance Checklist for Rice Mills

• CMR invoicing: custom-milling invoices to OSCSC / MARKFED are raised as job-work services under SAC 9988, not as sales of rice under HSN 1006.
• By-product sales: every sale of rice bran and broken rice is invoiced at the applicable GST rate, with customer GSTINs captured correctly for GSTR-1.
• Cash purchases under Section 40A(3): each cash paddy purchase above ₹10,000 in a day is made directly to a farmer and supported by a land record, ID copy and signed voucher (Rule 6DD(e)).
• Payments to intermediaries: all payments to brokers, traders and arhtiyas go through banking channels.
• Daily outturn log: daily outturn is tracked against the 67% (raw) and 68% (parboiled) norms, with moisture readings recorded when paddy moisture exceeds 14%.
• TDS under Section 194Q: party-wise purchases are tracked against the ₹50 lakh threshold; milling charges from State agencies are treated under Section 194C. No TCS is collected under the omitted Section 206C(1H).
• Mandi cess under Section 43B: outstanding mandi cess is paid before the due date of the income tax return.

GST rates, notifications and procurement norms change from season to season. Confirm the current rates and the terms of your agency agreement before relying on the figures in this guide.

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Related services

• Rice mill and food processing subsidy, Chhattisgarh
• GST return filing
• Tax audit