Looking for expert help with Income tax and GST for cotton ginning and pressing mills India? The team at Tax Garden, based in Kondapur, Hyderabad, helps Indian SMEs stay compliant. End-to-end filings, notices, and deadline tracking, all in one place.
Key Takeaways
- Kapas (raw cotton) bought from a farmer is under reverse charge. The registered mill pays 5% GST in cash, then takes it back as credit (Notification 4/2017-Central Tax (Rate), S. No. 4A).
- Lint, cotton waste, cottonseed, linters and cottonseed oil are 5%. Cottonseed oil cake and sowing-quality cottonseed are exempt (Notifications 9/2025 and 10/2025-Central Tax (Rate)).
- Ginning or pressing someone else's cotton is 5% job work only if the owner is GST-registered. For an unregistered owner, the entry points to 18%.
- Cash to the farmer for kapas is outside the Rs 10,000 limit of Section 40A(3), but it still counts in the 5% cash test that decides whether your audit limit is Rs 1 crore or Rs 10 crore.
- Audited mills: the AY 2026-27 audit report is due 21 October 2026 and the ITR 21 November 2026 (CBDT Circular 07/2026).
Who pays GST on raw cotton bought from farmers? The buyer pays. Raw cotton (kapas, heading 5201) supplied by an agriculturist to a registered person is taxed under reverse charge at 5% (2.5% CGST plus 2.5% SGST), under S. No. 4A of Notification 4/2017-Central Tax (Rate), in force since 15 November 2017. The farmer doesn't need to register and doesn't charge GST.
A ginning factory sits between two very different worlds. On one side are farmers who sell kapas for cash at the factory gate and never issue a bill. On the other are spinning mills that want a clean tax invoice, often across a State border, and deduct TDS on large purchases. GST and income tax treat each side differently, and that's where most of a ginner's compliance work sits. This guide is for owners of ginning and pressing factories, cotton traders and the CAs who audit them. It covers GST from 22 September 2025 and income tax for FY 2025-26 (AY 2026-27) under the Income-tax Act 1961, with the 2025 Act section numbers that apply from 1 April 2026.
What GST do you pay when you buy kapas from farmers?
You pay it, not the farmer. Since 15 November 2017, raw cotton under heading 5201 supplied by an agriculturist to any registered person is on the reverse charge list (S. No. 4A of Notification 4/2017-Central Tax (Rate), inserted by Notification 43/2017-Central Tax (Rate)). The rate is the one for cotton in Schedule I of Notification 9/2025-Central Tax (Rate): 2.5% CGST plus 2.5% SGST.
Three things follow:
- You must be registered. Anyone liable to pay tax under reverse charge has to register, whatever their turnover (Section 24(iii), CGST Act). A farmer selling only their own produce doesn't need to register (Section 23(1)(b)).
- You raise the paperwork. Issue a self-invoice for kapas received from an unregistered farmer within 30 days of receipt (Section 31(3)(f) and Rule 47A, CGST Rules), and a payment voucher when you pay them (Section 31(3)(g)).
- You pay it in cash. The electronic credit ledger can be used only for output tax (Section 49(4)), and the definition of output tax excludes reverse charge tax (Section 2(82)). The tax you pay becomes input tax credit for lint and cottonseed sales once it's paid.
Who counts as an agriculturist? Section 2(7) of the CGST Act limits it to an individual or Hindu Undivided Family who cultivates land, by own labour, family labour, or hired labour under personal supervision. A farmer producer company, a cooperative society or a kapas trader is not one, so S. No. 4A doesn't apply to their sales. If they're registered, they charge 5% on their own invoice.
Step-by-Step Guide
Buying Kapas from a Farmer: GST Steps
Confirm the seller is the grower
S. No. 4A of Notification 4/2017-CT(R) applies only to an agriculturist: an individual or HUF who cultivates land (Section 2(7), CGST Act). Keep the farmer's name, village and land details.
Issue a self-invoice within 30 days
Raise a tax invoice on yourself for the kapas received (Section 31(3)(f), Rule 47A). Group a day's purchases if your software allows, but within the 30-day window.
Issue a payment voucher
Record each payment to the farmer with a payment voucher (Section 31(3)(g)).
Pay 5% reverse charge in cash
Report the purchase in GSTR-3B as an inward supply liable to reverse charge and pay 2.5% CGST plus 2.5% SGST from the electronic cash ledger (Sections 2(82), 49(4)).
Claim the credit back
Once paid, the same tax is input tax credit, set off against GST on lint and cottonseed sales.
Source: CGST Act 2017, Sections 2(7), 2(82), 23, 24, 31, 49; Rule 47A, CGST Rules; Notification 4/2017-CT(R) S. No. 4A
Example (October 2026, a Telangana mill): you buy kapas worth Rs 2,00,00,000 from farmers. Reverse charge is 5%, or Rs 10,00,000 (Rs 5,00,000 CGST and Rs 5,00,000 SGST), paid in cash. In the same month you sell lint worth Rs 1,40,00,000 to a spinning mill in Tamil Nadu (5% IGST, Rs 7,00,000) and cottonseed worth Rs 60,00,000 to a local oil mill (5%, Rs 3,00,000). Output tax is Rs 10,00,000. Your Rs 10,00,000 reverse charge credit plus, say, Rs 50,000 credit on power, bale wrapping and repairs covers it, and you carry Rs 50,000 forward.
The tax roughly washes out, but the cash doesn't. In peak season you're paying 5% on every truckload of kapas before the bales are sold. Plan that working capital from November onwards.
GST rates on lint, cottonseed and by-products
Almost everything that leaves a ginning factory is 5%. The one useful exception is cottonseed oil cake, which is exempt.
Comparison
GST on Cotton and Ginning By-products from 22 September 2025
| Product (HSN) | GST | Notification entry |
|---|---|---|
| Kapas, lint, cotton waste (5201 to 5203) | 5% | 9/2025-CT(R), Schedule I, S. No. 331 |
| Cottonseed for crushing, not of seed quality (1207) | 5% | 9/2025-CT(R), Schedule I, S. No. 67 |
| Cottonseed of seed quality (1207) | Nil | 10/2025-CT(R), S. No. 83 |
| Cotton linters (1404) | 5% | 9/2025-CT(R), Schedule I, S. No. 76 |
| Cottonseed oil, refined or not (1512) | 5% | 9/2025-CT(R), Schedule I, S. No. 89 |
| Cottonseed oil cake (2306) | Nil | 10/2025-CT(R), S. No. 107 |
| Cotton yarn, other than khadi (5205 to 5207) | 5% | 9/2025-CT(R), Schedule I, S. No. 333 |
Source: Notifications 9/2025 and 10/2025-Central Tax (Rate), 17 September 2025, in force 22 September 2025. IGST on inter-State sales is 5% (Notification 9/2025-Integrated Tax (Rate), Schedule I).
Two practical points:
- Bales to other States. Most lint goes to spinning mills in other States. Any inter-State taxable sale requires registration regardless of turnover (Section 24(i)), and it also rules out the composition scheme (Section 10(2)(c)). Composition would also stop you charging GST or claiming credit (Section 10(4)), so it rarely suits a ginner whose kapas reverse charge is a large credit.
- Expellers in the same premises. If you crush cottonseed and sell exempt oil cake alongside 5% oil, credit on common inputs such as power has to be split. Only the share used for taxable supplies can be claimed (Section 17(2)).
Every consignment above Rs 50,000 needs an e-way bill before the truck leaves (Rule 138, CGST Rules). Our e-way bill guide walks through it. For how reverse charge works in general, see our RCM guide.
Ginning on job work: 5% or 18%?
Plenty of factories gin and press cotton that belongs to someone else and bill only a processing charge. The rate depends on who owns the kapas.
From 22 September 2025, S. No. 26 of Notification 11/2017-Central Tax (Rate), as substituted by Notification 15/2025-Central Tax (Rate), puts job work on "textiles and textile products falling under Chapters 50 to 63" at 2.5% CGST. Raw cotton is Chapter 52, so ginning for a registered spinning mill or trader is 5%. But "job work" under Section 2(68) of the CGST Act means processing goods belonging to another registered person. When the owner is an unregistered farmer, the charge falls under item (vii), "treatment or process on goods belonging to another person", at 9% CGST, which is 18% in all.
The farm-services exemption at S. No. 54 of Notification 12/2017-Central Tax (Rate) covers processes "carried out at an agricultural farm" that don't alter the produce's essential characteristics. A ginning factory isn't a farm, and ginning separates seed from lint. If you do custom ginning for farmers, get a written view from your CA before you decide what to bill. Our job work guide covers the challan rules when the principal sends you cotton.
Income tax: books, audit and the AY 2026-27 dates
A ginning mill's profit is taxed as business income under the head "Profits and gains of business or profession". If the owner also farms, keep the farm's accounts separate from the mill's.
Presumptive tax is rarely available. Section 44AD covers resident individuals, HUFs and partnership firms (not LLPs) with turnover up to Rs 2 crore, or Rs 3 crore if cash receipts don't exceed 5% of turnover. Deemed profit is 6% of turnover received through banking channels and 8% of the rest. Even a small factory crosses Rs 3 crore in one season.
The audit limit depends on your cash payments, not just your sales. Under Section 44AB(a), a business with turnover above Rs 1 crore needs a tax audit. The limit rises to Rs 10 crore only if cash receipts and cash payments are each within 5% of the total.
Example (partnership firm, FY 2025-26): turnover Rs 8,00,00,000, all received by bank transfer. Total payments Rs 7,60,00,000, of which Rs 1,20,00,000 was cash to farmers. Cash payments are 15.79% of total payments, above 5%. So the Rs 10 crore limit doesn't apply, turnover is above Rs 1 crore, and the firm needs a tax audit. Paying farmers by bank transfer would have kept it below Rs 10 crore and outside audit.
For AY 2026-27, CBDT Circular No. 07/2026 dated 28 September 2026 extended the due dates for audit cases:
Comparison
AY 2026-27 Due Dates for an Audited Ginning Mill
| Filing | Original date | Extended date |
|---|---|---|
| Tax audit report (Form 3CA/3CB with 3CD) | 30 September 2026 | 21 October 2026 |
| ITR for audit cases (Explanation 2(a) to Section 139(1)) | 31 October 2026 | 21 November 2026 |
Source: CBDT Circular No. 07/2026 dated 28 September 2026, incometax.gov.in Latest News
From FY 2026-27 the Income-tax Act 2025 applies. Presumptive tax moves to Section 58 (Table, S. No. 1) and the audit limits to Section 63 (Table, S. No. 1), with the same rupee figures. Our Section 44AD guide has the detail.
Cash to farmers and TDS from spinning mills
Cash for kapas. Section 40A(3) disallows an expense where you pay one person more than Rs 10,000 in cash in a day. Rule 6DD(e) of the Income-tax Rules 1962 exempts payments for agricultural produce made to the cultivator, grower or producer. Rs 80,000 in cash to the farmer who grew the kapas stays deductible. The same Rs 80,000 to a trader or commission agent doesn't. Keep the farmer's name, village and a signed receipt with each cash payment.
The Rs 2 lakh ceiling. Section 269ST bars anyone from receiving Rs 2 lakh or more in cash from one person in a day, for a single transaction, or for one event. That binds the farmer when you pay them. A Rs 3,50,000 kapas lot can't be settled in cash in one go, and splitting it across days doesn't help when it's one transaction. See our cash limits guide.
TDS on your lint sales. A spinning mill whose turnover exceeded Rs 10 crore in the previous year deducts 0.1% on what it pays you above Rs 50 lakh in the year. Say a mill buys lint worth Rs 3,00,00,000 from you in FY 2026-27. TDS is 0.1% of Rs 2,50,00,000, or Rs 25,000, under Section 393(1), Table S. No. 8(ii), of the 2025 Act (Section 194Q of the 1961 Act until 31 March 2026). Claim it in your ITR from Form 26AS or AIS. If your own turnover crossed Rs 10 crore, you deduct on large purchases from registered traders too. Our Section 194Q guide covers both sides.
Common mistakes ginning mills make
- Treating farmer purchases as tax-free. The farmer charges nothing, but the mill owes 5% under reverse charge on every kapas purchase from them. Skip it and the tax falls due later with interest, and the credit you'd have used against lint sales was never taken in time.
- Paying reverse charge from the credit ledger. Reverse charge tax must go from the cash ledger (Sections 49(4) and 2(82)).
- Applying S. No. 4A to FPOs and traders. Only an individual or HUF who cultivates land is an agriculturist. Purchases from a registered FPO or trader come with their own 5% invoice.
- Billing farmers' ginning at 5%. The 5% job-work rate needs a registered owner. For an unregistered farmer the entry points to 18%.
- Ignoring cash payments in the audit test. Rule 6DD(e) saves the deduction, but the cash still counts toward the 5% payment test in Section 44AB.
How Tax Garden helps ginning and pressing mills
We issue kapas self-invoices on time, pay reverse charge from the cash ledger and set the credit against lint and cottonseed sales through our GST return filing service. At year end we prepare the books, run the cash tests, complete the tax audit and file the firm's return through our ITR filing service. Starting a new factory? Our GST registration service gets you registered before the first kapas arrives. We also file the TDS returns for 194Q deductions through our TDS filing service. Related reading: our guides for spice traders and fruit and vegetable wholesalers.
