Widening the net

The move -- following the 47^th GST Council meeting held late last month -- to impose a 5 per cent GST on specified ‘pre-packaged and labelled foods’ with effect from last Monday, has evoked a somewhat exaggerated outcry. The logic behind the move is actually quite straightforward: any act of value addition is open to be taxed. So far, GST on foodstuffs was levied on the basis of a distinction between ‘branded’ and ‘unbranded’ goods. This marker has been dispensed with; now, a distinction will be drawn between ‘pre-packaged and labelled’ foodstuffs and loosely traded ones. So, products that are packaged in accordance with’ the provisions of the Legal Metrology (LM) Act, 2009, which spells out standards of weights and measures, will attract 5 per cent GST. Such packaged foodstuffs are presumably graded and cleaned, commanding a higher price than items sold loose – whether or not they are ‘brands’ in the commonly understood sense of the term. In many medium-scale provision stores in urban areas, these items are packaged and sold in the store’s name, in accordance with the provisions of the LM Act. Their rice, wheat and pulses could now attract GST, akin to branded items sold by large chainstores. Lots of over 25 kg/litres, however, are exempt from GST. The move does not impact lower rung stores which sell provisions loose to their consumers, provided they purchase in lots of over 25 kg. The middle level stores could move to loose selling after some processing, which can lower prices on account of savings on GST and plastics packaging. Hence, the move may not be inflationary, as feared. There is a larger dynamic here that needs to be recognised: the big difference between farmgate and retail price that cannot entirely be explained by storage and transport costs, as in the case of pulses. A 5 per cent levy on this distribution chain should not hurt the intermediaries too much. It will also formalise the intermediation process, bringing their actions under scrutiny.

The implementation of the move could, however, lead to chaos on the ground on various counts. First, the directive makes a distinction between regular consumers on the one hand and ‘commercial, industrial and institutional’ consumers on the other, exempting the latter from 5 per cent GST. But this could lead to confusion and rent-seeking by inspectors. Second, the absence of clarity on many aspects of the July 13 notification (despite a clarification being issued later) opens it to misuse. Those outside its ambit, such as small retailers, could be harassed by the police and inspectors. For instance, the former may be misled into believing that selling items loose amounts to tax evasion. Alternatively, innocuous packaging that falls outside the ambit of the LM Act (a packet without a name or a specified weight, or a mere newspaper cover) may be viewed with suspicion. The CBIC should issue detailed operational instructions to its staff and carry out an awareness campaign for ordinary traders and consumers, to prevent misuse of the new GST provision. Clear communication of policy becomes crucial here.

It would be inaccurate to say that the GST Council has gone back on its initial promise to exempt food items from tax, as a large section of the food retail trade continues to be outside the ambit of GST. However, the effects of the move on the vulnerable would need to be watched.

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