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GST implementation smooth, but traders confused as anomalies surface
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Saturday, 19 August, 2017, 08 : 00 AM [IST]
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Ashwani Maindola, New Delhi and Shraddha Joshi
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One month has passed since the implementation of Goods and Services Tax (GST), independent India’s biggest indirect tax reform, but it has been a mixed bag. Although the implementation has been smooth, it has created confusion amongst the traders and brought many anomalies (regarding the GST rates, the applicability of HSN codes, the implications of reverse change, the raising of correct invoices and the claiming of input tax credit thereof) to the fore.
Experts opined that while the industry and associations have played a vital role in ensuring that the transition to the new tax regime was smooth, the government did omit a few subjects, which have become a cause for concern.
Piruz Khambatta, chairman, Rasna Pvt Ltd, said, “The implementation has been smoother than expected, and I think the government of India and the industry associations have played a big role as far as knowledge definition and removal of confusion are concerned.”
However, he added that although there were a few problems, those were within an acceptable range.
Khambatta explained that there were certain anomalies. He said, “Firstly, exporters have to block their money and then obtain a refund. Secondly, on a host of products, taxes have been increased. These include instant food mixes, custard powder and frozen chicken. On all these products, the rate of GST levied is higher than it was prior to the implementation of the tax.”
“And because of the increase in the rates of tax levied on them, many products are beyond the reach of the common man. So the government should relook at it,” he added.
S Jindal, president, All India Food Processors’ Association (AIFPA), stated, “Moreover, the criteria of aggregate turnover for the micro-, small and medium-sized enterprise (MSME) sector, the merger of the manufacturing and service thresholds, the blockage of finances, the imposition of GST on the advanced payments received for booking orders and the standings of food products under the GST regime were some of the other issues creating challenges for the food processing industry.”
Pricing
Meanwhile, independent experts also felt that the industry was still struggling to understand the nuances of the new tax regime.
Although the taxes were largely kept at low rates, this has transpired in the reduction of the rates of products in many categories.
Lakshmi Iyer of Avalon Global Research, said, “A month after the implementation of GST, the industry is still struggling to understand the new tax regime.”
“In the food processing industry, a minimum rate of tax has been imposed, creating a win-win situation for both consumers and traders,” she added.
“Unbranded raw materials like atta, maida and sooji, which have placed in the zero per cent tax slab, is poised to benefit manufacturers in the processed food category,” Iyer said.
“The GST Council has placed branded food products in the five per cent tax slab. This has forced approximately three-fourths of branded food products to turn unbranded to evade the tax,” she added.
“There has been a neutral impact on the end prices of farm products, such as edible oils, tea and coffee,” Iyer said.
“To maintain the revenue neutrality, the GST Council, in its 16th meeting revised the tax rates of 66 items to 12 per cent from the previously proposed 18 per cent,” she added.
“Dry fruits and processed food items, such as jams and sauces, fall under higher tax slabs than their pre-GST levels,” Iyer informed.
“This may lead to price increase and fall in consumption. Confusion still prevails regarding the new HSN codes. The initial impact of GST would be clear when the first returns are filed in August 2017,” she added.
Suraj Nagvenkar, senior research analyst, MarketsandMarkets, said, “The implementation of GST has differing effects on the various sub-sectors of the food and agriculture industry.”
“The maximum retail prices (MRPs) of processed foods have fluctuated slightly, whereas the prices and dynamics of food grains have experienced the maximum impact,” he added.
“The application of GST has significantly reduced the prices of food grains and has acted as a determinant for market decisions of procurement agencies, traders and food processing units,” Nagvenkar said.
“With no significant supply disruptions and elimination of market-distorting tax disparities, the above-mentioned stakeholders are finding it relatively easy in conducting business with grain-surplus states, such as Punjab, which previously charged heavy duty on raw materials such as wheat and rice, that prompted food processing units, such as flour mills, noodles and pasta manufacturing, and the biscuit and bakery players to procure their raw materials from other states, such as Gujarat, Uttar Pradesh, and West Bengal,” he added.
“With a level playing field and enabled ease in raw material supply, food processing units in India are currently experiencing a reduction in raw material costs, which has translated into cheaper prices of the final food products,” Nagvenkar said.
Post the implementation of GST, the MRPs of food products have experienced slight fluctuations.
The table below lists a few examples of products that have become more expensive, and those that have become cheaper, post the implementation of GST:
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Food
products that have become
more
expensive
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Food
products that have become cheaper
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Tea
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Biscuits
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Coffee
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Milk
and
milk-based
products
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Spices
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Cereals
and
grains
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Edible
oil
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Fruits
and
vegetables
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Sauces
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Packaged
snacks
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Branded & unbranded products
Five per cent GST will not be applicable on the supply of goods unless the brand name or trade name is actually on the Register of Trade Marks and is in force under the Trade Marks Act, 1999.
The Central GST (CGST) rate on the supply of certain goods, such chena or paneer, natural honey, wheat, rice and other cereals, pulses, flour of cereals and pulses, and goods other than those put up in unit containers and bearing a registered brand name, is nil.
The supply of such goods, when put up in unit containers and bearing a registered brand name, will attract 2.5 per cent CGST.
Sagar Anand Kurade, managing director, Suman Project Consultants Pvt Ltd, and immediate past president, AIFPA, said, “Doubts have been raised by the industry regarding the meaning of the term registered brand name.”
“The ministry of finance has clarified that unless the brand name of trade name is actually on the register of Trade Marks and is in force under the Trade Marks Act, 1999, five per cent GST will not be applicable on the supply of such goods,” he added.
“It seems that since India Gate Basmati Rice brand, which is manufactured by KRBL, is not a registered trade mark, the company can sell its rice within India at zero per cent GST,” Kurade said.
“Like KRBL Ltd, this would give an edge to all non-registered trade mark brands selling rice over registered trade mark brands,” he added.
“We hope that the government relooks at this discrepancy through a future amendment to the GST Act and notification,” he added.
“While the need of the hour is that the country’s food processing industry moves from the unorganised sector to the organised sector to ensure traceability and avoid adulteration, the GST Act, in its current form, does not seem to be encouraging the same,” he said.
Experts opined that for e-commerce portals, the transition was rather smooth. Vishwa Vijay Singh, co-founder, SaleBhai.com, said, “It has been over a month since the implementation of GST, and its implication has not been felt greatly by us as an e-commerce brand offering a wide range of food products.”
“Most of our sellers had already registered themselves by the time the GST was implemented (on July 1, 2017), so it was a smooth transition. The remaining sellers will complete their registrations within the coming 15-20 days,” he added.
Jindal said, “One month of GST has been a great beginning, but with massive challenges.”
GST was the culmination of many years of planning, evaluation and formulation. The nation has accepted the challenges involved with grace, but there are huge in-built limitations and adverse financial implications.
Let us look at the following points.
Anomalies in HSN codes
There are various complications in the fixation of HSN codes. For instance,
- Mango pulp has the HSN Code 08045040 in Central Excise Tariff, but it is not clear in the GST Code Schedule
- HSN Code 0811 reads as follows: “Fruit and nuts, uncooked or cooked by steaming or boiling in water, frozen, whether or not containing added sugar or other sweetening matter”. Here the frozen version has been included, but the other than frozen version is missing. The word frozen needs to be changed to frozen or not to cover both versions. A large part of the industry is held up owing to this anomaly
- Some simple products, like khoya barfi, have gone from the five per cent slab to the 28 per cent slab if it has a layer of chocolate on the top. Khoya barfi comes in different forms, and it is not advisable to discriminate the product. All traditional sweets should fall under HSN Code 210690 at five per cent GST
- In HSN Code 0903, the description of mate reads as follows: “Mate, a bitter infusion of the leaves of a South American shrub”. The words South American are limiting the scope of the product and causing unnecessary restrictions in the field. Mate can be infusions of leaves of different shrubs and not necessarily limited to the shrubs of a particular place. It is important that the anomalies in HSN codes are resolved soon, as uncertainties create confusion and disrupt the industry, leading to litigation, thereby wasting precious time and resources of the government and the industry
Procedure of reverse charge
The procedure of reverse charge, self-invoicing, depositing tax and credit later is very cumbersome and will block finances. This is a big challenge for the MSME sector and should be withdrawn.
Criteria of aggregate turnover
A grossly unjust provision has been made in the GST law on the criteria of aggregate turnover. In Central Excise regulations, the aggregate turnover of a unit to determine the eligibility of a manufacturing threshold of Rs 1.5 crore was the aggregate of taxable transactions.
In contradiction, the GST law has stipulated the aggregate turnover to determine the eligibility of a basic threshold of Rs 20 lakh and a composition threshold of Rs 75 lakh by including taxable transactions and also non-taxable/exempt transactions, exports and any other. This is unjustified and illogical and creates mistrust between the government and businesses. It is strongly recommended that it must be rectified. If we want businesses to develop trust in the system, the system has to offer trust.
Merging of manufacturing and service thresholds
A serious economic error has crept into the GST law. The manufacturing threshold of Rs 1.5 crore, provided under Central Excise, and the services threshold of Rs 10 lakh, provided under Service Tax, have been merged.
The fundamental point is that every manufactured product has a service component, known as processing cost, and a material component, known as raw material cost.
It is not possible to equate the services threshold with an entity which has a material component. It is a huge error.
It also needs to be mentioned that the manufacturing threshold was last updated at Rs 1.5 crore vide N/No 8/2007 dated March 1, 2007, and with the price index change, it should be Rs 3.25 crore now.
We all know that India’s MSME sector has grew during the last 25 years, providing 90 per cent of product, employment and exports because of the manufacturing threshold.
This has sent a wrong message and shaken the industry’s confidence. It also conveys a feeling that ground realities have been overlooked in certain decisions.
The least the government should do is double the basic threshold from Rs 20 lakh to Rs 40 lakh and the composition threshold of Rs 75 lakh to Rs 1.5 crore.
Blockage of finances
There is a critical limitation in GST regarding the blockage of finances. The buyer’s finance is held up to the extent of the tax amount till the seller deposits the tax.
If the buyer is sourcing material from a number of suppliers, he will be constantly under stress and waste precious time.
Moreover, a firm will have to pay GST when goods are moved from the factory to the warehouse, which may take time for sale and realisation.
The GST paid upfront will block finances, the firm’s operations will be hindered and the product will become expensive on account of the cost of held up finances.
The depletion of resources is a serious bottleneck to growth.
GST on advance payments received for booking orders
The payment of tax on receiving advance money against the booking of an order is bereft of logic and technically incorrect.
The spirit of GST is to levy tax on the supply of goods and services. Receiving an advance payment is purely a business procedure to ensure the commitment of the buyer.
When the goods or services under order have not been prepared, there is no question of supply or paying tax.
This is another provision which lowers the government’s pedestal to the advocacy of trust-building.
It is counterproductive to growth and damages the confidence of businesses.
GST on advance money received on booking of order needs to be withdrawn.
Where do food products stand under GST?
Food is life-sustaining and a means of social fulfillment. It is an economic chain, beginning with growing and ending in the consumer’s hand.
Truthfully, if health and education deserve to be kept out of the GST ambit, food deserves it first.
Unfortunately, food continues to be a revenue object. Even if the farmer has to abandon his crop in the glut season, we still want to tax the food made from it.
It is high time the government realises this ground reality and reviews the Food Revenue Policy. The nation has suffered too much for too long.
Subjecting food to four GST slabs (five per cent, 12 per cent, 18 per cent and 28 per cent) is not the solution.
The argument that GST is the sum total of the existing taxes is not correct.
Central excise was levied on fruit and vegetable products at zero per cent (for units working below the manufacturing threshold of Rs 1.5 crore) and at two per cent without Central Value-added Tax (CENVAT) credit (for 99 per cent of the remaining units in the country) with a country-wide average VAT of five per cent.
Even by adding the effect of 0.5 to one per cent input tax on packaging, the total tax incidence ranges between five and seven per cent.
GST has placed these products at 12 per cent tax, which is neither justified nor viable. Even if some tax was levied on food earlier, it can be reconsidered. There is always a new beginning for something good.
It is strongly recommended that a number of foods placed at five per cent, 12 per cent, 18 per cent and 28 per cent GST are reduced to zero per cent, five per cent, 12 per cent and 18 per cent, respectively.
Do we expect prices of food products to reduce?
The agricultural produce used as raw material to make food products is exempt from tax, and therefore, any tax levied on food products is a direct burden on the consumer.
Food comprises between 40 to 60 per cent of a normal household’s expenditure, and tax on food is highly inflationary.
A thoughtful decision needs to be taken to keep food products out of the ambit of tax or to reduce the tax burden.
The final submission
The food sector is highly burdened with the uncertainties and vulnerabilities of weather and crop, leading to spoilages and damages.
Agricultural produce is mostly seasonal in nature, and has to be stored for use throughout the year, causing heavy blockage of funds and storage costs/losses.
It is not easy for an entrepreneur to pull through such burdens. Working under constant perishability risks, it is an extremely sensitive sector.
The government’s policies need to reflect trust and considerate decision-making.
Both the farmer and the consumer must be safeguarded. The effect of taxes on food products is highly detrimental for both.
Taxing food products must be avoided as much as possible. India is globally placed either first, second or third in most segments of farm produce, and has the potential to become a leading player in the international food trade.
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