The Central Board of Indirect Taxes (CBIC) recently announced that effective 18th July 2022, pre-packaged cereals, pulses, curd, milk, etc. will be liable for 5% Goods and Services Tax (GST). Given that these are items of everyday use and need the imposition of tax will hit the wallets of the common people in an already inflation-ridden economy. While the opposition has attacked the government and stalled the parliament on this issue, there are two policy aspects which need to be explored. First, whether this is an entirely new levy of tax on products of daily use, and second, how this episode exposes the gap between the promise of GST and the reality.
Before proceeding, here is a glimpse of what the GST is. GST was introduced as a mechanism to streamline different taxes and levy tax only at the incident of consumption. Before GST was introduced in 2017, the system of indirect taxes was an assortment of several taxes levied by both the Central and State Governments. The incidences of these taxes, too, were at each stage in the market. For example, excise was levied by the State Governments at the time of manufacturing, and Value Added Tax (VAT) was levied at the time of consumption. For services provided, the Central Government charged Service Tax.
Coming to the first question – whether the taxation of pre-packaged cereals, pulses, curd, milk, etc. is an entirely new levy. Before GST, most states levied VAT on foodgrains and other products which are under the scanner now. After GST was introduced, most of these products were exempted from tax. The first time the issue came under consideration was at the 14th Meeting of the GST Council. The proposal before the Council was to tax ‘branded products (cereals) packed in unit containers’ at the rate of 5%. While Ministers from Kerala, Puducherry, Bihar, Punjab, Jharkhand and Assam supported the proposal, Ministers from Haryana, Gujarat, West Bengal and Karnataka did not support it. The Chairperson, Union Finance Minister Arun Jaitley is on record to have said that “it would be politically unwise to tax packed and branded milk”. Finally, the Council agreed to decide on the issue at a later date.
A detailed agenda note was circulated before the 15th Meeting of the GST Council, providing illustrations of the difference in prices between unbranded and unbranded atta, rice, etc. Accordingly, taxing branded products was taken up during the meeting. Ministers from Assam, Punjab, and Bihar supported the proposal. On the other hand, Ministers from Karnataka, West Bengal and Delhi did not seem to support the proposal initially. The Minister from Karnataka suggested that since the thrust of the country was towards ‘encouraging standard and quality food products, brands which were following this should not be penalized. The Minister from Delhi expressed an apprehension that brands would promote their products under different brand names. The Chairperson suggested that since brands spend on advertising their products they would be able to get input credit on the same. For example, if brands had paid INR 5 as GST on advertising and branding per packet, and if the GST due from customers on that packet is INR 3, it can be adjusted against the INR 5 paid already and the GST payable for the brand would be only INR 2. Eventually, the Council agreed to “tax cereals, pulses and flour put up in a unit container and bearing a registered brand name at the rate of 5%”.
In the 21st Meeting of the GST Council, the topic came up again. It was observed that since the meaning of registered brands was derived from the Trade Marks Act, several registered brands were seeking deregistration. The Government assumed that the sudden spike in deregistration applications was for avoiding the GST liability. Therefore 4 more conditions were added to clarify who would be liable to pay GST on branded food grains. These related to mentioning a cut-off date to avoid misuse of deregistration provisions, expanding the definition of \’brand\’ to include those brands registered under the Copyright Act, including brands registered under any law in another country and deeming unregistered brands in respect of which actionable claim is available as brands for the purpose of GST. The notifications affecting the change in definitions of registered brands were ratified in the 22nd Meeting of the GST Council.
Subsequently, the Minister from West Bengal in the 29th Meeting of the GST Council and the Minister from Tamil Nadu in the 39th Meeting of the GST Council raised concerns about brands foregoing their actionable claims in the brand name, thereby creating a loss to the exchequer. The proposed solution was to remove the distinction between branded and unbranded food grains, exempting the item from GST entirely. The Minister from Uttar Pradesh also raised this concern in the 41st Meeting of the GST Council, without offering a solution for the same.
Finally, in the 47th Meeting of the GST Council, it was decided that all pre-packaged and labelled products will be liable to tax. The definition of “pre-packaged and labelled” will be as per Section 2(l) of the Legal Metrology Act read along with the Legal Metrology (Packaged Commodities) Rules, 2011. Therefore, any “pre-packaged and labelled” products under 25 kgs or 25 litres will henceforth be taxed at 5%. However, loose items will not be taxed as per this change. For example, buying a pre-packaged 5 kg atta packet will be subject to 5% GST but buying 5 kgs atta sold in loose quantity at a flour mill will not attract this tax. Therefore, this move is being justified by the government, not as a sudden change, but only to reduce tax avoidance done by brands, as is clear through the detailed FAQs released by the PIB as well as Finance Minister Nirmala Sitharaman’s tweets.
However, the claim that there is significant tax loss to the exchequer because of tax avoidance by firms giving up actionable claims in their brands has not been supported by any evidence as of now. It may be possible that the detailed statistics have been discussed in the Meeting of the GST Council. Since the minutes of the meeting have not been published, it is impossible to surmise in favour of the government’s decision.
This is a classic case of the problem of unintended consequences. First, the Council realised that brands were charging consumers not only for the product but also for their brand, and therefore, decided to tax it. Secondly, brands, as a consequence, found ways to not be considered registered brands under the definition. Even after plugging the gaps in the definition, it seems as though firms have found ways to bypass the tax regime. This begs the question, of whether these consequences could have been foreseen?
This episode reveals the cracks in the GST framework and exposes the gap between the promise of one nation one tax and its reality. There are today three different laws – the CGST Act, SGST Acts for each state and IGST Act; 7 different tax slabs – 1.5%, 3%, 5%, 12%, 18% and 28%, as well as exempted items; different rates for goods and services, and hundreds of items which are charged different rates of tax. The GST Council meets to decide the rates of items and to rationalize rates of taxes; the Council has met 47 times in the last 5 years averaging twice every three months. This undermines the certainty of law according to which businesses and individuals plan their resources. There is an urgent need for discussion on the nature of the implementation of GST, and the recent controversy has created fertile ground for it.