India's new GST tax regime comes in for
criticism - analysis
By Raghavendra Verma | 26 May 2017
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India's pan-industry business association ASSOCHAM has hailed the central government's new GST
regime, a move to standardise goods and services tax rates in the country, as the biggest economic
achievement in the three years since Prime Minister Narenda Modi took office. However, as just-food
reports, there is some concern about the new framework's potential impact on value-added products.
Food industry executives and experts in India have called for a simplification of the country's incoming goods and
services tax (GST) regime as it applies to food, criticising the levying of higher rates on value-added manufactured
foods that can drive market growth.
With the nationwide tax being levied from 1 July, the announcement of a wide variety of rates by India's GST
Council last week has caused concern, which is rather ironic given a key aim of the reform was to streamline sales
taxes – until now a patchwork of national, state and municipal charges.
Rather than food being subjected to one or two rates – which is standard practice in most developed markets – the
Indian system will see food products covered by zero, 5%, 12%, 18% and 28% tax rates. To some extent, the logic
behind the decision has been to lower GST for basic items bought by poor consumers but there are additional
complexities throwing up some potentially market disrupting anomalies.
Piruz Khambatta, chairman at the Confederation of Indian Industries' national committee on food processing, has
called for some major changes, arguing the GST regime should at least ensure all food products mentioned in
chapter 20 of its schedule (which covers preparations of vegetables, fruits, nuts or other plant parts) and chapter 21
(so-called miscellaneous edible preparations) be included in the 5% and 12% bands only.
Instead, many preserved vegetables (such as tomatoes, mushrooms and nuts) are in the 18% bracket and mixed
condiments and seasonings attract 28%, for instance. Meanwhile, Khambatta points out the rate for processed
packed food products such as instant mixes for idlis (rice cakes), dhoklas (a batter snack), soups, chilli sauce,
garlic ginger mixes and more is 18%. The current combined rate of their sales taxes is usually 10% to 11% "and so
the price of all these will go up substantially", Khambatta warns.
A similar sales tax hike can be expected for squashes, jam, mango chutney and button mushrooms,
Khambatta says, pointing out they will attract 18% GST, compared to current combined sales tax rates of 10%11%.
Khambatta says India's government is making a strategic mistake by mandating lower rates for basic fresh foods,
exempting products such as fresh tomatoes, apples, bananas and mango, while charging higher rates for processed
foods.
Far from helping poorer consumers, the move will harm them, he suggests. "The government should encourage
food processing as it adds value, which helps farmers, instead of taxing [these products] at a higher bracket of
18%," he tells just-food. "Our GDP growth in agriculture is dismally low [and] if food processing grows,
agriculture GDP would also grow. Higher taxing will hamper the food processing industry, leading to [a] lowering
of agriculture growth."
More food manufacturing would reduce agricultural waste, offer time savings to domestic cooks, and provide
standardised safe food that promotes good health, Khambatta argues. "Branded/packed products should be at lower
tax wherein consumers get better quality, better packed, more nutritious food."
Similar concerns were voiced by Kuldeep Sharma, the so-called chief thinking officer, at Suruchi Consultants,
dairy sector advisers based in the northern state of Uttar Pradesh.
Sharma highlights how confusing complexity occurs in the schedule, even for relatively similar products. He takes
paneer, the Indian cheese, as an example. "The product is tax-free if sold without branding and without packing
but if you put in a container and brand it, then 5% GST will be charged."
Sharma argues paneer manufactured informally "in unhygienic conditions" will be sold tax-free, while "the one
being manufactured and packed hygienically is to be taxed".
A similar penalty appears set to apply to to sales of sweetened flavoured milk. Generally, it will attract 5%
category GST but if fruit pulp is added to the ingredient mix then the tax rate will rise to 28%.
C.P. Charles, the chairman of the Indian Dairy Association's south zone, noted the complexity of the milk
segment, where different kinds of milk can be zero, 5%, or 18% rated depending on the final product. "There are
different variants of milk, like double-toned milk, toned milk, standardised milk and full cream milk being sold in
India. Clarification in this regard is needed." While the new GST regime would simplify taxes compared to the
outgoing system, addressing this type of issue "would go a long way in augmenting the growth of the
industry, Charles argues.
Moreover, Charles suggests there are regressive elements to the new GST structure. He cites ghee, a clarified
butter used widely in Indian cooking, as an example. He notes that, while many basic products were zero-rated,
ghee will attract a 12% tax. "Ghee is one of the principal consumer products sold in India across all category of
people irrespective of strata," Charles says. Such a levy, Charles suggests, would primarily hurt the interest of poor
consumers who may not be able to afford ghee any longer, with small-and-medium-sized entrepreneurs
manufacturing and selling ghee suffering as a result.
Sharma does put forward one reason for the apparent complexity in the new GST regime. He says some tax
classifications are based on how food is categorised for food safety controls. Sharma acknowledges it might make
sense for certain similar foods to have different safety controls because of how they are made but believes it does
not make sense for them to have different GST rates, especially when that leaves an opening for different levels to
be charged for similar or identical foodstuffs, differing only by packaging.
Work on rationalising and harmonising tax and food safety classifications within India could remove the potential
for such variety in GST rates, Sharma says. "A lot of confusion in the minds of the stakeholders could be
resolved." Without it, companies may start to finesse their packaging and formulations to ease their products into
lower GST brackets, he warned, good news for consultants like him, but maybe not so good for free competition
and innovation. "What I envision is a transparent mechanism with no scope of manipulation or deliberation at any
level," Sharma says.
One other potential source of confusion is the authority allowed under the GST regulations for tax officials to
value food sold for taxation purposes – maybe ignoring its actual price. Sharma notes even if a retailer sells a dairy
beverage forINR30 per bottle and charged 5% GST, a tax official might see the same product being sold elsewhere
at INR50 per bottle and decide all such products be valued at INR50, even when sold for INR30. The official
would be expecting 5% of INR50 GST to be handed over from the retailer selling at INR30, "and show
outstanding tax" in tax assessments.
Additional reporting by Poorna Rodrigo and Keith Nuthall .