Referring to a list of 12 grains and their flours, Union Finance Minister Smt. Nirmala Sitharaman announced that “GST on these goods shall apply when supplied in “pre-packaged and labelled” commodities attracting the provisions of Legal Metrology Act. For example, items like pulses, cereals like rice, wheat, and flour, etc, earlier attracted GST @ 5% when branded and packed in unit container. From 18.7.2022, these items would attract GST when “pre-packaged and labelled”.

Brand and Unbranded

Let us clarify this rigmarole. One, when GST was originally drawn up after elaborate discussions, the GST Council decided to exempt food grains and 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. Thus, the existing GST tax system exempted ordinary consumers and smaller companies from tax burden while the big brands were in the tax net.

Pre-packaged and Non-packaged

Two, the recent changes announced by the Union Finance Minister has turned the situation upside down. She has removed the distinction between branded and unbranded. From 18.7.2022, 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 “pre-packaged and labelled” of a commodity would equally attract tax.

The Legal Metrology Act defines ‘pre-packaged commodity’ as a commodity which 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 that now these commodities are being sold in the market. They all would attract 5 per cent tax.

Solution for Tax Evasion

What is the rationale of this move? Once again, we quote from Finance Minister`s tweets: “Taking this into account, when GST was rolled out, a GST rate of 5% was made applicable on BRANDED cereals, pulses, 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 supplier. However, soon rampant misuse of this provision was observed by reputed manufacturers & brand owners and gradually GST revenue from these items fell significantly.”

It is very rare for an established company which has invested huge resources in building up the brand would give it up and they were stuck with 5 per cent tax. A saving clause for them came with the later amendment to the tax where the brand was defined as “REGISTERED brand or brand on which enforceable right was not foregone by supplier”.

The big companies simply printed an explanatory note on the container that they were foregoing the “enforceable right”. This was clearly an attempt to avoid 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.

Packages of More than 25 Kg

The full scale of the corporate appeasement will be 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 large scale already. The tweets of the Union Finance Minister do not contain in any reference to this exemption given to larger packages.

The new amendments clearly favour corporate interests who can avoid the tax burden to great extent. She 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. This rampant evasion in tax was also observed by States.”

Reduction of Tax Rates on Luxuries

The elaborate discussions in the Council while initially deciding the rates included detailed examination of the pre-GST Central and State taxes and the total existing burden on each of the commodities and 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 per cent. They were reduced to a uniform 28 per cent which was determined as the highest tax rate under GST. The major rates are 5, 12, 18 and 28. Besides there are 0 rated commodities, 3 per cent for gold and 0.25 per cent for precious metals. An elaborate exercise assured that the rate structure would be revenue neutral ie. the revenues from the new GST rates would not result in any reduction of revenue receipts when compared to the pre-GST situation.

Ad hoc Downward Revision of GST Rates

Unfortunately, with the Lok Sabha elections on the horizon central government took initiative to reduce the tax rate on commodities particularly the 28 per cent. No assessment was presented on the revenue implications of these reductions. On the eve of elections, no finance ministers could object to such reduction. Very soon they were competing in reducing the rates. The biggest casualty was the 28 per cent which was virtually decimated. 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 per cent tax rate. As we have already noted the tax burden on the consumer durables had been substantially reduced at the time GST was formulated and further benefited under the pre-election reduction frenzy.

Importance of Progressivity in GST Tax Structure

But the corporates and Union government would have none of these suggestions. Instead of the taxing the rich they want to pass on the burden to commodities which are consumed by ordinary people. This fully fits with corporate clamour for merging the present multi-rate GST into a single rated one or fewer number of rates for improving the ease of doing business.

If there is movement to a single rate, GST would lose even the semblance of progressivity in an otherwise regressive indirect tax. Tax rates on consumer durables and urban consumer products are the ones which have seen the sharpest decline. It is these same products which would further gain if the demand for a maximum ceiling rate of 18 per cent is accepted.

Rate Revision – The Gainers and Losers

While tax on grains, their products and curd have been brought into the tax at net at 5 per cent the existing tax rate on number of commodities have been further raised. Commodities like solar water heater, leather, and services like hotel rooms below ₹ 1000 and hospital rooms above ₹ 500 and contracts have been raised from 5 per cent to 12 per cent. Many commodities like LED lamps, ink, blades, pumps, cycles, various types of machines have been raised from 12 per cent to 18 per cent. The tax on contracts which were at 12 per cent have been increased to 18 per cent.

In not a single case of luxury goods the tax rates have been raised from 18 per cent to 28 per cent. So, the intention is very clear – the government of India wants to eliminate 28 per cent rate ie. 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.

The problem of multiplicity of rates is exaggerated. One only needs to think of the rate structure that existed before GST to realize the extent to which the tax structure has been simplified. Given the mass poverty and high level of income inequality in the country, it is preposterous to suggest a common rate of tax for grain flour and luxury vehicles. The ideal of equity should be considered at least as important as the ease of doing business. Excess simplification is the anathema of fairness.

The States and Tax Revision

Another justification for the tax hike given by the Union Finance Minister`s tweet is that “the states were collecting significant revenue from food grain in the pre-GST regime. Punjab alone collected more Rs 2,000 crore on food grain by way of purchase tax. UP collected Rs 700 cr.” This is true historically tax on grain Punjab which was an exporting state was high and some of the states did have low tax on food grains and products, particularly, if they were branded. But this can not be a common future. Historically grains have been tax exempted in the country.

Further, Union Finance Minister has claimed that all states had agreed to the rate revision.

“This was a unanimous decision by the GST Council. All states were present in GST Council when this issue was presented by the Group of Ministers on Rate Rationalisation in the 47th meeting held in Chandigarh on Jun 28, 2022.
All States, including non-BJP States (Punjab, Chhattisgarh, Rajasthan, Tamil Nadu, West Bengal, Andhra Pradesh, Telangana, Kerala) agreed with the decision. This decision of the GST Council is yet again by consensus.”

This was not true. Kerala Finance Minister had communicated his disagreement in taxing necessities through a written letter to the GoM. Some states had expressed their disagreement in the Council itself. 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.

The Tax Hike to Stoke Inflation

Finally, what is most despicable about the GST rate hikes is the timing of the decision. The country is facing a severe bout of inflation. The retail inflation is above 7 per cent. The whole price index has increased by 15 per cent. The food stuffs with 24 per cent weightage in the index has increased by 16.9 per cent in the month of June. In short, food inflation is an important contributor to the inflationary conditions in the country. Now this 5 per cent tax is certainly going to worsen the situation. Thus the rate hikes are regressive, inflationary and will lead to tax leakages.