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Industry reacts cautiously to GST, 28% additional cess on luxury items
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Wednesday, 09 November, 2016, 08 : 00 AM [IST]
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Ashwani Maindola, New Delhi
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fiogf49gjkf0d fiogf49gjkf0d The GST Council announced the tax slabs under the new indirect tax regime of goods and services tax. The slabs include five per cent, 12 per cent, 18 per cent and 28 per cent. Besides, ultra-luxury items will attract an additional cess above 28 per cent.Although the fine print of the items is yet to be decided, the food processing and beverage industry reacted cautiously to the proposal.
While they welcome the essential items like food coming under zero per cent tax category, the uncertainty on the packaged food and beverage items and part of it likely coming under 12 per cent category is what worrying the industry. Besides, placing aerated drinks at the highest tax slab plus the proposal of putting a cess on it, has also upset people.
After the meeting of the Council, its chairman and finance minister Arun Jaitley said that on nearly half of the consumer inflation basket, including food grains, the GST will be charged at zero percent, while the lowest slab of five per cent will be for items of common consumption.
There would be two standard rates of 12 per cent and 18 per cent, which would fall on the bulk of the goods and services. This includes fast-moving consumer goods, which is worrying the industry.
Piruz Khambatta, chairman, Confederation of Indian Industry (CII)committee on food processing, and chairman, Rasna Pvt Ltd, said that there wasn’t any need for the 12 per cent slab and that processed food products should come under the lower rate of five per cent.
“While the raw food items will fall under zero per cent category, the food processing industry would not get the benefit of input credit. Besides, there will be duty on the output. So food processing industry being based on raw agriculture products should also be levied mini tax (i.e. five per cent). There is no need of a 12 per cent slab under GST and if the food processing industry comes under the 12 per cent slab, it will lead to inflation,” he added.
“Meanwhile, most services are expected to become costlier as the ones being taxed currently at the rate of 15 per cent are likely to be put in the 18-per cent slab,” said revenue secretary Hasmukh Adhia.
The highest slab of 28 per cent will include white goods and all those items on which the current rate of incidence varies from 30-31 per cent. The principle for determining the rate on each item will be to levy and collect the GST at the rate slab closest to the current tax incidence on it.
Jaitley said the Council would review annually the tax revenue raised from the cess that will fund compensations from the Centre to the states for losses arising out of the transition to the GST. The Centre has given a constitutional guarantee to the states for making good these losses for a period of five years.
The GST will subsume the multitude of cesses currently in place, including the Swachh Bharat Cess, the Krishi Kalyan cess and the education cess. Only the clean environment cess is being retained, revenues from which will also fund the compensations.
Krishan Arora, partner, Grant Thornton India,said, “While the consensus on rate structure among Centre and the states seems to be a step closer towards timely implementation of GST, the essence of the multiple split tax rates will need to pass the test of industry acceptance on grounds of revenue neutrality and zero cascading across sectors specially goods falling in the 28% bracket.”
“The government would need to ensure that multiple rates proposed for goods and services do not inherit the legacy issues around classification anomalies,” he added.
“As regards the recommendation of levying cess on sin goods, which otherwise seems contrary to the spirit of GST, the logic seems to be to ensure adequate revenue to the Centre for compensating states over next 5 years, however the same should not adversely impact the ultimate tax costs of such goods and to the extent possible, should be applied at last point of supply chain and not distort the overall credit regime,” Arora said.
Industry reaction
IBA
The Indian Beverage Association (IBA) was disappointed at the categorisation of aerated drinks as demerit/luxury goods in the goods and service tax rate slabs announced by the GST Council.
At Rs 10 for 200ml bottles, aerated drinks are neither luxury drinks, nor do they carry the kind of health hazards attributed to them. The issue of negative externalities around aerated drinks has already been laid to rest.
IBA reiterated that
? Aerated drinks are not sin goods, as the Centre itself had accepted the position by removing such goods from Schedule VII of the Finance Act, 2005 in the 2015-16 Budget
? There are observations by the court on the basis of the report of an expert panel that the ingredients present in aerated drinks do not pose any health hazard
? Aerated drinks are not luxury goods. They cater to the average hydration needs of Indians in the form of immediately-available hygienic and safe drink source
? The consumer base of aerated drinks ranges from the low income group to the high income group.Aerated drinks are supplied even to rural villages and semi-urban cities
IBA wished to clarify that currently the incidence of tax on aerated drinks was not 40 per cent as conjectured by some. Currently, for GST purposes, the combination of Central excise duty and state value-added tax (VAT) in the country was as given below:
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Number of states
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Current Central Effective ED12.6% of MRP (ED of 21% with 40% abatement=
12.6%)
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Approximate Current State VAT
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Total Tax incidence
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4
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12.6%
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12.50%
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25.1%
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4
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12.6%
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13.50%
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26.1%
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12
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12.6%
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14.50%
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27.1%
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4
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12.6%
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15.00%
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27.6%
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5
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12.6%
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20.00%
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32.6% (most of these states raised VAT in last one year as drought tax to
meet revenue deficit, hence this cannot be the basis for a long term tax
calculation)
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1
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12.6%
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25.00%
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With 5% drought tax
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1
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12.6%
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30.25%*
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42.85%
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*This rate is applicable in the state of Punjab and is levied at the first point of sale only.
The states of Maharashtra, Madhya Pradesh and Rajasthan raised VAT as late as in the second half of 2015.
It was, thus, evident that over 80 per cent of the states were taxing this category at less than 28 per cent (the highest slab for GST rate).
In the circumstances, when the applicable tax rates on aerated drinks with abatement already stood at an effective 30-31 per cent, IBA did not subscribe to therecommendation of an additional cess on aerated drinks over and above the 28 per cent GST rate.
This industry was confident that the government would take note of its commitment to the Make in India programme launched by the prime minister of India - food processing and aerated beverages have been one of the largest contributors to the foreign direct investment (FDI) in the country - andthat it would not be discriminated against in GST.
Needless to mention, this increase in taxes would lead to an increase in the price ofsoft drinks, restricting their purchase by the general mass, besides providing encouragement to spurious manufacturers to sell their products on the basis of the cost arbitrage.
In these highly difficult circumstances, IBA urged the GST Council not to impose any additional tax burden by way of cess on aerated drinks, which could well amount to being the last straw on the camel’s back. The viability of the industry could be in grave danger because of such a consistent adversarial tax approach.
CAIT
The Confederation of All India Traders (CAIT) urged Jaitley to bind manufacturers to declare price of their products for pre- and post-GST regime to ensure that if at all cost of production is reduced by virtue of different categories of tax rates under GST and the input they would be obtaining from the taxes paid on various expenses made in furtherance of business, the benefit of such reduction has reached the end consumer.
Generally, it is observed that whenever there was any reduction in the tax rate, the rate of the respective commodity was never reduced by the manufacturers largely and consumer was denied with the logical benefit. Such a anomaly should not be a part of a progressive taxation system like GST.
PHD Chamber of Commerce
Welcoming the GST rate structure of five per cent, 12 per cent, 18 per cent and 28 per cent, Mahesh Gupta, resident, PHD Chamber of Commerce and Industry,said 28 per cent tax on white goods is not in sync with the present tax reforms.
He added that the high tax rate would have a cascading impact on the consumer goods segment and hit consumer demand majorly in the rural segments of the economy as demand is primarily emerging for the rural sectors of the economy.
“I strongly believe that the impact of GST would be a major game-changer for the economy for accelerating the economic growth and generating more and more employment opportunities,” saidGupta.
“The lowest tax rate of five percent is suggested to be levied on items of mass consumption such as spices, mustard oil, etc. which are used particularly by common people is a welcome step. The standard tax rate of 12 and 18 percent would accommodate most of the goods and services including processed foods, soaps, oil, smart phones etc.,” he added.
“We appreciate the preemptive measures to keep inflation under check as essential items including food, which presently constitute roughly half of the consumer inflation basket, will be taxed at zero per cent,” said Gupta.
CII
On multiple GST rates, CII said the GST rate structure can be absolute limit of four rates as suggested by the Government, and over time, the Government should commit to converge to one or two rates.
Further, it added that it is also important that the bulk of goods and services should fall within the standard rate of 18% and only as exception to go to the higher rate of 28% and a lower rate for essential goods such as unprocessed food items, etc.
CII agreed with the proposal that the higher rate of 28% should apply only to demerit goods and that the term luxury goods should not be used to define this category.
It also suggested that the cess needs to be levied only at the final product and total tax, including cess on demerit goods, should be kept within the present overall indirect tax incidence.
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