Behind the fuss about GST on essential items: Two sides of the same coin

The GST council, in its 47th meeting, recommended a levy at the rate of 5% on certain essential items such as pulses, rice, cereals, etc., when supplied as “pre-packaged and labeled” items. These changes are effective from 18th July 2022.

Earlier, these items were taxable only if supplied under a brand name and packed in a unit container. Now, the distinction between branded and unbranded items has been done away with to bring all pre-packed and labeled items within the GST net, even if such items are unbranded and without any unit container. It is pertinent to note that this amendment applies only to those pre-packaged items that are covered in the definition of “pre-packed commodity” under the Legal Metrology Act, 2009

The levy of GST on essential items such as pulses, cereals, and rice has led to an uproar that it will lead to a rise in prices and impact the common man. This viewpoint gains importance, particularly under the current economic situation of high inflation in fuel and daily consumables that have affected the ‘ ‘household budget.

In this context, the following points merit attention. First, these changes apply only to the goods covered under the Legal Metrology Act, where most items in question are already being sold under the brand name on payment of GST. Thus, it is unlikely to result in any significant gain in revenue collections, unlike the recent windfall tax on fuel. On the contrary, the Hon’ble Union Finance Minister has clarified that there were concerns regarding revenue leakage as certain businesses were misusing the exemption provision for unlabelled food items by not registering them. This is what has led to the decision to withdraw the exemption and bring the pre-packaged and labeled food items under the GST net.

She further clarified that only the modalities of imposition of GST on these goods have changed with no change in coverage of GST except for two or three items.

Second, any changes in the GST can only be implemented with consensus between the Centre and the States, based on the clearly laid out process in the form of the recommendations of the GST council. Therefore, ‘ ‘it’s not a unilateral move but rather based on the larger consensus. Thus, viewed from this prism, the opposition from the state Governments is a bit surprising. Recently, the Hon’ble Finance Minister of Kerala has mentioned that his State does not intend to levy GST on essential items, which small stores sell in one to two Kg packets.

Any such exceptions would only distort the overall framework of the GST and will make it even more complex, adding to disputes and litigation.

GST has completed five years since its introduction in 2017. On an overall basis, it has unified the nation as one market, though there are many issues that need to be addressed.

Overhauling of GST structure has always been on the agenda of the Government. The Government has shown tremendous agility in addressing the requirements of the businesses through various changes/amendments over time.

One pain point that remains to be addressed is the multiple slab rates; mind it, there are no easy answers to the same. Against the backdrop of the Revenue Neutral Rate (RNR) (i.e., one slab rate for all goods and serves) of about 15.5%, the current structure has multiple slab rates, given the background of how GST evolved from the erstwhile Sales Tax / VAT, Central Excise and Services Tax. Many items, including the services, currently fall under the slab rate of 18%. Some of the daily consumption items, primarily branded and labeled goods, now fall under the 5% slab rate, while there are multiple items where no GST is levied/collected.

Further, we should not forget that till a large majority of the society comes under the tax net and comply with the law in both letter and spirit, widening the tax net will continue to pose a challenge for the Government. This is evident from our country’s abysmally low Tax to GDP ratio. Unless this happens, it is also challenging to lower the tax rates on the direct tax and GST front and further simplify the GST slab rate structure.

In a nation as large as India, with multiple stakeholders, ‘ ‘it’s not an easy task to have simplified fiscal legislation. Therefore, ‘ ‘it’s going to be a long and slow journey, with regular tussle. But, probably, ‘ ‘that’s how a large and vibrant democracy functions!

(Vikas Vasal, National Managing Partner Tax and Manoj Mishra, Associate Partner, Grant Thornton Bharat LLP)

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