Are Contract Growing and Milling Services VAT-Exempt? NIRC Section 109(F) Explained
A rice mill’s fee for milling palay into rice, a sugar mill’s fee for milling cane into raw sugar, and a poultry or hog contract grower’s service fee are all exempt from 12% VAT under NIRC Section 109(F) — a service-side exemption that sits alongside, but is distinct from, the product-side exemption for agricultural food in its original state. The exemption has a real boundary, though: it depends on the processing being packaged as contract growing or milling for others, not sold as a standalone toll-processing service outside that arrangement.
Simplify Your Agri-Business BIR Compliance FREE →What does Section 109(F) actually cover? #
Section 109(F) exempts two related categories of service: agricultural contract growing, and milling for others of specifically enumerated crops — palay into rice, corn into grits, and sugar cane into raw sugar. The statutory language is narrow and specific:
“Services by agricultural contract growers and milling for others of palay into rice, corn into grits and sugar cane into raw sugar.”
Revenue Regulations No. 16-2005 defines an “agricultural contract grower” as a person producing, for another party, poultry, livestock, or other agricultural and marine food products in their original state — the classic example is a poultry or hog contract-growing arrangement, where a company owns the day-old chicks or piglets and feed, and a contract grower raises the animals to market weight in exchange for a growing fee, without ever taking ownership of the animals themselves. Revenue Memorandum Circular No. 97-2010 further clarified the VAT exemption of services rendered by agricultural contract growers specifically, confirming how the exemption applies to that toll-growing model.
Where’s the line between exempt “packaged” processing and taxable standalone processing? #
The exemption attaches to processing performed as part of a genuine contract-growing or milling-for-others arrangement — when the same kind of toll processing, toll dressing, or toll manufacturing is instead sold as an independent, standalone service outside that structure, it generally falls back into the 12% VAT system. This distinction matters because the economic activity can look identical from the outside — a facility processing someone else’s raw agricultural product for a fee either way — but the tax result differs depending on how the arrangement is structured and documented. A poultry contract grower raising a company’s birds under a toll-growing contract is exempt; a separate slaughterhouse or dressing plant that simply charges a per-bird processing fee to whichever customer walks in, without the underlying contract-growing relationship, is generally providing a VATable service instead.
| Service | Section 109(F) treatment |
|---|---|
| Contract grower raising poultry/livestock owned by another party, for a growing fee | Exempt |
| Rice mill milling a trader’s palay into rice, for a milling fee | Exempt |
| Corn mill milling corn into grits, for a milling fee | Exempt |
| Sugar mill milling cane into raw sugar, for a milling fee | Exempt |
| Standalone toll dressing/processing service sold independently of a contract-growing arrangement | Generally VATable |
| Coconut milling into copra or coconut oil | Not covered by Section 109(F)’s enumerated list |
How does this connect to the exemption for the finished product itself? #
Section 109(F) exempts the milling or contract-growing service; a separate provision, Section 109(A), exempts the sale of the resulting agricultural food product in its original state — the two exemptions cover different transactions in the same supply chain, and a business can qualify for one without automatically qualifying for the other. A trader who owns palay, pays a mill a fee to process it into rice, and then sells that rice benefits from both exemptions on two separate legs of the transaction: the milling fee is exempt under Section 109(F), and the rice sale is exempt under Section 109(A) as an agricultural food product in its original state. See Is Selling Rice, Fish, or Vegetables VAT-Exempt? Agricultural and Marine Food Products Under NIRC Section 109(A) for the product-sale side of this same supply chain, and VAT-Exempt Transactions Under NIRC Section 109 for the complete Section 109 list.
Worked example #
A palay trader owns 1,000 sacks of palay and contracts a local rice mill to process it into milled rice for a milling fee of ₱50 per sack, totaling ₱50,000. The trader then sells the resulting milled rice to a wholesaler for ₱1,200,000.
- The mill’s ₱50,000 milling fee to the trader is exempt from VAT under Section 109(F), since it’s a milling-for-others service covering palay-into-rice processing.
- The trader’s ₱1,200,000 rice sale to the wholesaler is separately exempt from VAT under Section 109(A), since milled rice is treated as an agricultural food product in its original state.
- If the same mill instead charged a poultry processor a standalone dressing fee for birds the processor already owns outright — with no underlying contract-growing relationship between the two — that dressing fee would generally be a VATable service rather than falling under the Section 109(F) exemption.
Frequently asked questions #
Is a rice mill’s milling fee VAT-exempt? #
Yes, when the mill is milling palay into rice for others — NIRC Section 109(F) exempts services by agricultural contract growers and milling for others of palay into rice, corn into grits, and sugar cane into raw sugar from the 12% value-added tax.
What is an agricultural contract grower for purposes of this exemption? #
Under Revenue Regulations No. 16-2005, an agricultural contract grower is a person who produces poultry, livestock, or other agricultural and marine food products in their original state for another party, typically under a toll-growing arrangement where the grower raises animals or crops owned by the contracting company in exchange for a service fee.
Does toll processing always qualify for the exemption? #
No. When toll processing, toll dressing, or toll manufacturing is performed as part of a packaged contract-growing service, it falls within the Section 109(F) exemption. But when the same kind of processing is performed independently — as a standalone service not tied to a contract-growing arrangement — it is generally subject to 12% VAT instead.
Is milling coconut into copra or oil covered by this exemption? #
No. Section 109(F) specifically names milling of palay into rice, corn into grits, and sugar cane into raw sugar — coconut processing is not among the enumerated milling services this provision covers, so a coconut miller’s processing fee is analyzed under different rules.
Does the farmer who owns the palay or sugar cane also get a VAT exemption on the eventual sale? #
Yes, separately. The milled or produced output — rice, raw sugar, or agricultural food products in their original state — is generally exempt under NIRC Section 109(A) when the farmer or trader sells it. Section 109(F) exempts the milling and contract-growing service itself, while Section 109(A) exempts the resulting product’s sale.
Summary #
NIRC Section 109(F) exempts a specific, enumerated set of agricultural processing services — contract growing, and milling palay into rice, corn into grits, or sugar cane into raw sugar — from VAT, so long as the processing is packaged as a genuine contract-growing or milling-for-others arrangement rather than sold as an independent toll-processing service. It pairs naturally with the Section 109(A) exemption for the resulting food product’s own sale, covering two separate legs of the same agricultural supply chain. See VAT-Exempt Transactions Under NIRC Section 109 for how both exemptions fit into the full Section 109 list.