GST Classification of Sun-Cured Tobacco Leaves: AAAR West Bengal Rules in Favour of 5% Rate

Case Overview

In re Om Jai Balajee Construction Private Limited (GST AAAR West Bengal)

The West Bengal Appellate Authority for Advance Ruling (WBAAAR) recently pronounced its decision in a significant appeal concerning the GST classification and applicable tax rate on sun-cured tobacco leaves. The appeal was preferred by the Deputy Commissioner, State Tax, Bowbazar Charge, Government of West Bengal, challenging the advance ruling issued by the West Bengal Authority for Advance Ruling (WBAAR) vide Advance Ruling Order No. 28/WBAAR/2025-26 dated 13.02.2026. The AAAR ultimately dismissed the Revenue's appeal and affirmed the WBAAR's ruling that sun-cured tobacco leaves, including those subjected to grading, bundling, or butting, continue to qualify as "tobacco leaves" attracting GST at the rate of 2.5% CGST + 2.5% SGST under Entry No. 162 of Schedule I to Notification No. 01/2017-Central Tax (Rate) dated 28-06-2017.

Background and Business Activity of the Assessee

M/s Om Jai Balajee Construction Private Limited, the respondent before the WBAAAR, is primarily engaged in construction activity in and around Kolkata. The company proposed to diversify its operations by entering the tobacco leaf trading business. Under this proposed activity, the assessee intended to purchase tobacco leaves directly from cultivators and farmers and resell them to other dealers without carrying out any significant further processing.

Before embarking on this new line of business, the assessee filed an application under sub-section (1) of Section 97 of the Central Goods and Services Tax Act, 2017 and the West Bengal Goods and Services Tax Act, 2017 (collectively referred to as "the GST Act") before the WBAAR seeking an advance ruling on three key questions:

  1. What GST rate would apply to tobacco leaves purchased from farmers after sun-curing in fields and sold to other traders, where the assessee's own activity is limited only to storage and stocking?
  2. What GST rate would apply if the assessee segregates tobacco leaves into grades based on size, colour, shade, length, or texture before selling them?
  3. What GST rate would apply if the tobacco leaves are sold after removing the butt portions to prevent damage during transportation?

Assessee's Position Before the WBAAR

The assessee advanced the following key arguments before the WBAAR:

  • Tobacco is an agricultural crop, and the variety grown in West Bengal is predominantly used for manufacturing khaini, chewing tobacco, and hookah tobacco.
  • Farmers sun-cure tobacco leaves after harvest to reduce moisture content and make them commercially viable. Freshly plucked green tobacco leaves are highly perishable and cannot be transported or marketed in their raw state.
  • The assessee proposed to purchase such cured leaves and supply them as-is, with only routine storage and stacking activities undertaken to prevent fungal growth and heat build-up, without adding any chemical or external substance.
  • Manual operations like grading (based on width, colour, shade, length, and texture), bundling, and butting (trimming the rough edge of the leaf) may be undertaken depending on buyer requirements, but none of these alter the essential nature of the tobacco leaves.
  • Notification No. 9/2025-Central Tax (Rate), dated 17th September 2025 prescribes GST at 5% on "tobacco leaves" under Heading 2401, while "unmanufactured tobacco; tobacco refuse (other than tobacco leaves)" under the same heading attracts GST at 28%.
  • Under Notification No. 4/2017-Central Tax (Rate) dated 28.06.2017, procurement of tobacco leaves from agriculturists is subject to GST under reverse charge mechanism at 5%, and subsequent forward-charge supplies attract the same rate.
  • Circular No. 332/2/2017-TRU dated 27.12.2017 clarifies that "tobacco leaves" for GST purposes include leaves of tobacco as such, broken tobacco leaves, and tobacco leaf stems.
  • The GST notifications do not restrict the term "tobacco leaves" to green, fresh, or uncured leaves. Where the legislature intended a distinction between fresh and processed goods, it has done so expressly.
  • Advance ruling decisions from Andhra Pradesh, Kerala, and Karnataka AARs consistently held that cured, graded, and butted tobacco leaves remain classifiable as "tobacco leaves" at the 5% GST rate.

Revenue's Contentions Before the WBAAR

The Revenue relied on the judgment of the Gujarat High Court in Patel Products v. Union of India, contending that:

  • Activities such as drying, cleaning, sieving, sizing, and cutting of tobacco leaves constitute "production" under Section 3(p) of COPTA, 2003.
  • In the said case, the commodity was held liable to GST at 28%, Compensation Cess at 160%, Excise Duty at 0.5%, and National Calamity Contingency Duty at 25%.
  • Since the activities involved in the present case similarly include drying, cleaning, and sizing, the Revenue argued that the tobacco leaves should not be classified at the concessional rate applicable to mere tobacco leaves.

WBAAR's Findings and Ruling

After examining the submissions of both sides and the relevant legal provisions, the WBAAR arrived at the following key conclusions: