Indias new goods and services tax rates set to come into force in July

India's new goods and services tax rates set to come into force in July

India's pan-industry business association ASSOCHAM has hailed the central government's new GST regime, a move to standardise goods and services tax rates in the country, as the biggest economic achievement in the three years since Prime Minister Narenda Modi took office. However, as just-food reports, there is some concern about the new framework's potential impact on value-added products.

Food industry executives and experts in India have called for a simplification of the country'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 1 July, the announcement of a wide variety of rates by India's GST Council last week has caused concern, which is rather ironic given 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 the decision has been to lower GST for basic items bought by poor consumers but there are additional complexities throwing up some potentially market disrupting anomalies.

Piruz Khambatta, chairman at the Confederation of Indian Industries' national committee on food processing, has called for some major changes, arguing the GST regime should at least ensure all food products mentioned in chapter 20 of its schedule (which covers preparations of vegetables, fruits, nuts or other plant parts) and chapter 21 (so-called 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, Khambatta points out the rate for processed packed food products such as instant mixes for idlis (rice cakes), dhoklas (a batter snack), 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", Khambatta warns.

A similar sales tax hike can be expected for squashes, jam, mango chutney and button mushrooms, Khambatta says, pointing out they will attract 18% GST, compared to current combined sales tax rates of 10%-11%.

Khambatta says India's government is making a strategic mistake by mandating lower rates for basic fresh foods, exempting products such as fresh tomatoes, apples, bananas and mango, while charging higher rates for processed foods.

Far from helping poorer consumers, the move will harm them, he suggests. "The government should encourage food processing as it adds value, which helps farmers, instead of taxing [these products] at a higher bracket of 18%," he tells just-food. "Our GDP growth in agriculture is dismally low [and] if food processing grows, agriculture GDP would also grow. Higher taxing will hamper the food processing industry, leading to [a] 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, Khambatta argues. "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, the so-called chief thinking officer, at Suruchi Consultants, dairy sector advisers based in the northern state of Uttar Pradesh.

Sharma highlights how confusing complexity occurs in the schedule, even for relatively similar products. He takes paneer, the Indian cheese, as an example. "The product is tax-free if sold without branding and without packing but if you put in a container and brand it, then 5% GST will be charged."

Sharma argues paneer manufactured informally "in unhygienic conditions" will be sold tax-free, while "the one being manufactured and packed hygienically is to be taxed".

A similar penalty appears set to apply to to sales of sweetened flavoured milk. Generally, it will attract 5% category GST but if fruit pulp is added to the ingredient mix then the tax rate will rise to 28%.

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. "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." While the new GST regime would simplify taxes compared to the outgoing system, addressing this type of issue "would go a long way in augmenting the growth of the industry, Charles argues.

Moreover, Charles suggests there are regressive elements to the new GST structure. He cites ghee, a clarified butter used widely in Indian cooking, as an example. He notes that, while many basic products were zero-rated, ghee will attract a 12% tax. "Ghee is one of the principal consumer products sold in India across all category of people irrespective of strata," Charles says. Such a levy, Charles suggests, would primarily hurt the interest of poor consumers who may not be able to afford ghee any longer, with small-and-medium-sized entrepreneurs manufacturing and selling ghee suffering as a result.

Sharma does put forward one reason for the apparent complexity in the new GST regime. He says some tax classifications are based on how food is categorised for food safety controls. Sharma acknowledges it might make sense for certain similar foods to have different safety controls because of how they are made but believes it does not make sense for them to have different GST rates, especially when that leaves an opening for different levels 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, Sharma says. "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," Sharma says.

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. Sharma notes even if a retailer sells a dairy beverage forINR30 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.

Additional reporting by Poorna Rodrigo and Keith Nuthall .