Explained | What is the controversy over GST levies on food? 

Why have pre-packaged and labelled food items been brought under the tax net now?

The story so far: From July 18, a 5% Goods and Services Tax (GST) has been levied on several food items and grains that are sold in a pre-packed, labelled form even if they are not branded. So far, these items, which include curd, lassi, buttermilk, puffed rice, wheat, pulses, oats, maize and flour, were exempted from the GST net. The fresh tax levies have attracted an outcry from traders as well as Opposition parties, with proceedings in Parliament’s Monsoon session repeatedly disrupted over the issue.

The 5% tax on unbranded packed food items was approved by the GST Council in late June, and was part of a broader set of changes in the GST structure to do away with tax exemptions as well as concessional tax rates. Some of the other items to have lost their tax-exempt status include bank cheques, maps and atlases, hotel rooms that cost up to ₹1,000 a night, and hospital room rents of over ₹5,000 a day. While the decision was signed off by the Council, chaired by Finance Minister Nirmala Sitharaman, after a two-day meeting in Chandigarh last month, the ground for such changes in the GST regime was set at the Council’s previous ‘regular’ meeting at Lucknow in September 2021. During that meeting, the Centre and States had discussed the need to raise revenues from the GST, which at the time of its launch five years ago, was premised on levying a ‘revenue-neutral’ rate of 15.5%. Officials made a detailed presentation to show that several changes in rates since 2017 had brought down the effective rate to 11.6%. Shoring up GST revenues was the driving force for the Council’s decision to form two groups of Ministers (GoMs) — one to consider steps to rationalise the tax rates and correct anomalies, and another to tap technology to improve compliance. The current rate changes stem from an interim report of the first ministerial group, led by Karnataka Chief Minister Basavaraj Bommai based on officials’ recommendations.

On Tuesday, Ms. Sitharaman hit out at misconceptions about the GST levies on food items and dismissed suggestions that they were imposed unilaterally by the Centre. The 5% levy, she said, was critical to curb tax leakages and was not taken by ‘one member’ of the GST Council alone as all States had agreed to the move. She also pointed out that all affected food items, including wheat, pulses, rice, curd and lassi, will be exempt from GST when sold loose. The Revenue Department has also clarified that pre-packed items weighing over 25 kg would not attract GST. While some States have now opposed the tax, the Finance Minister has asserted that all States, including Opposition-ruled States like West Bengal, Tamil Nadu and Kerala, had agreed to the move in the Council. The decision, she pointed out, was made with the ‘complete consensus’ of all members of the Council. Revenue officials have also noted that such items attracted taxes in several States before the GST regime was introduced. “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 a registered brand or brands on which enforceable right was not foregone by [the] supplier,” Ms. Sitharaman said. This tax exemption triggered ‘rampant misuse’ by reputed manufacturers and brand owners leading to a gradual drop in revenues.

The government has said that the GST hikes can be debated in Parliament once Ms. Sitharaman recovers from a COVID-19 infection. The traders’ body, the Confederation of All India Traders (CAIT), has urged all Chief Ministers to roll back the tax by holding an emergency meeting of the GST Council, arguing that 85% of the country’s consumers use such unbranded goods. Economists expect a marginal impact from these taxes on India’s consumer inflation rate that has now been over 7% through the first quarter of 2022-23. One will have to wait for August’s retail inflation print to gauge the effect. The GST Council is also expected to meet again in August, where the issue may be raked up afresh. Meanwhile, the Karnataka CM has urged firms to avail of input tax credits on their packaging material rather than transfer the full 5% tax onto consumers. On cue, the Karnataka Milk Federation partially rolled back price hikes for curd, lassi and buttermilk. How the majority of informal market players implement these taxes may be an important factor in determining the next chapter of GST rate rationalisation.