Controversy around GST rate hike

Instead of taking the simple route, someone came up with the bright idea of giving up the classification of branded and non-branded. This was a clever ploy to help corporates.
Image used for Representational purpose only. (Photo| Express Illustrstions)
Image used for Representational purpose only. (Photo| Express Illustrstions)

GST seems to be moving from one controversy to another. A rate revision, undoubtedly, is inevitable given the fact that the existing rate structure is not revenue neutral. But the regressive nature of the modifications made and the choice of timing has rendered the decision controversial.

Originally, the GST Council decided to exempt food grains and a number of necessities from tax. They would be taxed only if they were being sold under registered brands. Thus, retail traders or small companies who were selling grains or their flour, either loose, packaged or labelled, were exempted from tax. Their customers were mostly ordinary people who could not afford the higher prices of branded products.

The recent changes announced by the Union Finance Minister have turned the situation upside down. She has removed the distinction between branded and unbranded.

From July 18, 2022, all items would attract GST when “pre-packaged and labelled”. There is no reference to branding in the new system. A high-value brand and lower-priced “pre-packaged and labelled” commodity would equally attract tax.

The Legal Metrology Act defines ‘pre-packaged commodity’ as a commodity that, without the purchaser being present, is placed in a package, whether sealed or not, so that the product contained therein has a pre-determined quantity. This is the format in which these commodities are being sold in the market. They all would attract a 5% tax.

What is the rationale for this move? We quote from the Finance Minister’s tweets: “When GST was rolled out, a GST rate of 5% was made applicable on BRANDED cereals, pulses, and flour. Later this was amended to tax only such items which were sold under REGISTERED brand or brand on which enforceable right was not foregone by a supplier. However, soon rampant misuse of this provision was observed by reputed manufacturers & brand owners, and gradually GST revenue from these items fell significantly.”

The big companies simply printed an explanatory note on the container that they were foregoing the “enforceable right” and avoiding tax. Therefore, the ideal response should have been to modify the amendment. Instead of taking the simple route, someone came up with a bright idea of giving up the classification of branded and non-branded itself. This was a clever ploy to help the corporates.
The full scale of the concession given to corporate branded producers is highlighted when it is read along with another clause in the order. The packages of more than 25 kg are specifically exempt from making declarations under the Packaged Commodities (PC) rules, and hence it is reasonable to assume that they would not attract GST. Thus, the branded supplier will only have to raise the weight of the package to 26 kg to escape the tax net. This tax evasion is taking place on a large scale already.
The new amendments clearly favour corporate interests that can avoid the tax burden to a great extent. FM has virtually pleaded guilty in this regard. “This was RESENTED by suppliers and industry associations who were paying taxes on branded goods. They wrote to the Govt to impose GST uniformly on all packaged commodities to stop such misuse.”

When originally the GST rates were fixed, care was taken to ensure that the new GST rates were lower than the existing total combined central and state taxes. The greatest beneficiaries of this exercise were the consumer durables, whose existing tax burden ranged between 30% to 45%. They were reduced to a uniform 28% which was determined as the highest tax rate under GST. The exercise also ensured that the rate structure would be overall revenue neutral.

Unfortunately, with the Lok Sabha elections on the horizon, the central government took the initiative to reduce the tax rate on commodities, particularly the 28%. The ad hoc decisions to reduce the rates rendered the new rates no more revenue neutral.

This was the primary reason for the non-buoyancy of the GST revenue. Everyone realises the mistake and is convinced that an upward rate revision is unavoidable. The obvious step would have been to restore the 28% tax rate.

But unfortunately, the decision has been to increase the tax on necessities rather than consumer durables. The tax on grains, their products and curd have been brought into the tax net at 5%. Commodities like the solar water heater, leather, and services like hotel rooms below ₹1000 and hospital rooms above ₹500 and contracts have been raised from 5% to 12%.

Many commodities like LED lamps, ink, blades, pumps, cycles, and various types of machines have been raised from 12%to 18%. The tax on contracts which was at 12%, has been increased to 18%.
In not a single case of luxury goods have the tax rates been raised from 18% to 28%. So, the intention is very clear—the government of India wants to eliminate the 28% rate, i.e., further reduce the tax on luxury goods and increase the burden on necessities consumed by ordinary people. Nothing can be more regressive than this stand.

Many states did oppose the proposal to increase the tax rate on necessities. Kerala Finance Minister had communicated his disagreement in taxing necessities through a written letter to the GoM.
But no voting was conducted. This has been the practice of the Council except for the Lottery tax rate revision when Kerala forced a division. Therefore, it is unfair to claim that all states had agreed to the decision.

Finally, this is the worst time to increase the tax rate on foodstuffs. The retail inflation is above 7%. The whole price index has increased by 15%. The foodstuffs with 24% weightage in the index increased by 16.9% in the month of June. Now, this 5% tax is certainly going to worsen the situation. Thus, the rate hikes are regressive, inflationary and will lead to tax leakages.

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