INDIA’S GST REGIME UNFAIRLY DISCRIMINATES AGAINST BRANDED FOOD MANUFACTURERS SAY EXPERTS
May 26th, 2017BY RAGHAVENDRA VERMA, in New Delhi, POORNA RODRIGO and KEITH NUTHALL INDIAN food industry executives and experts have called for a simplification India’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 July 1, the announcement of a wide variety of rates by India’s GST Council last week has caused concern. This is ironic given that 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 this has been lowering GST for basic items bought by poor consumers, but there are additional complexities throwing up some potentially market disrupting anomalies.
Piruz Khambatta, chairman at Confederation of Indian Industries’ national committee on food processing, called for some major changes, arguing that the GST regime should at least ensure that all food products mentioned in chapter 20 of its schedule (preparations of vegetables, fruits, nuts or other plant parts), and chapter 21 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, he pointed out that the rate for processed packed food products such as instant mixes for idlis (rice cakes), dhoklas (a batter snack) and 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”, warned Mr Khambatta.
A similar sales tax hike can be expected for squashes, jam, mango chutney and button mushrooms, he said – they will attract 18% GST, compared to current combined sales tax rates of 10%-11%.
Mr Khambatta said that the government was making a strategic mistake by mandating lower rates for basic fresh foods (exempting products such as fresh tomatoes, apples, bananas and mango), charging higher rates for processed foods.
Far from helping poorer consumers, this was actually harming them, he suggested: “The government should encourage food processing as it adds value, which helps farmers, instead of taxing [these products] at a higher bracket of 18 percent,” he told just-food.
“Our GDP growth in agriculture is dismally low – if food processing grows, agriculture GDP would also grow,” he said, boosting rural incomes, “but higher taxing will hamper the food processing industry, leading to 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, he stressed: “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, chief thinking officer, at Suruchi Consultants, dairy sector specialist advisers based in Uttar Pradesh. He highlighted how confusing complexity occurs in the schedule, even for relatively similar products. Regarding paneer, “the product is tax free if sold without branding and without packing but if you put in container and brand it, then five percent GST will be charged.” This means, noted Sharma, that paneer manufactured informally “in unhygienic conditions” is sold tax free, while “the one being manufactured and packed hygienically is to be taxed…” A similar penalty for manufacturing sophistication applies to sales of sweetened flavoured milk. Generally, it will attract 5% category GST, but dare to add fruit pulp to the ingredient mix, then see the GST soar to 28% – innovative dairy manufacturers beware.
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. He said: “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….,” he said. While GST would simplify taxes compared to the outgoing system, “addressing a few more issues like as mentioned above, would go a long way in augmenting the growth of the industry…”, said Mr Charles.
That said, he did give a nod to the government’s progressive GST taxation principles, at least as regards ghee (clarified butter used widely in Indian cooking). He noted that while many basic products were zero rated, ghee, which will attract 12%: “Ghee is one of the principal consumer products sold in India across all category of people irrespective of strata,” he said. Such a levy would primarily hurt the interest of poor consumers who may not be able to afford ghee as a result, he suggested, and many small-and-medium-sized entrepreneurs manufacturing and selling ghee would suffer as a result.
One reason for all this GST complexity, according to Mr Sharma, is that some tax classifications are based on how food is categorised for food safety controls. And while, he said, it might make sense for certain similar foods to have different safety controls, because of how they are made, it does not make sense for them to have different GST categorisation. This is especially when that leaves an opening for different GST rates 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: if that happened, “then 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,” said Sharma.
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. Mr Sharma noted that even if a retailer sold a dairy beverage for Indian Rupees INR30 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.