Understanding removal of exemption for food items
under Goods and Services Tax (GST)
Rohit Kumar Parmar Free lance [1]
IES (Retd)
Former Senior Economic Adviser
Government of India
Ministry of Consumer Affairs, Food and Public Distribution
1. Introduction
India has a high ratio and absolute number of poor, which has not been updated since 2011-12. The updation has not taken place because of quality issues of the 75th round of the National Statistical Office Consumer Expenditure Survey (CES) (2017-18). The next CES was to commence in July 2022, confirmation of which is awaited.
Per Capita GDP below the 2019-20 level, suggests that the ratio and absolute number of poor has increased. This would have further increased with covid, which commenced with the lockdown on 24/25 March 2020. [2] The pre-covid worsening is captured by a decline in nutritional status of children under 5 years (2019-20 compared to 2015-16) and higher anaemia among women compared to men. (NFHS-5 for 2019-20). This decline in nutrition of children under 5 and higher anaemia among women, would have worsened in 2020-21, due to the continuation of the decline; stagnant Per Capita GDP; and the fact that during the lockdown Aanganwadis were closed.
The government response to the stagnant Per Capita GDP and the increasing poverty ratio and numbers continues to be `business as usual’. Government has been contributing to (cost push) inflation, by increasing taxes including through cess, higher deficit and borrowing, which has not only increased ratio and absolute number of poor, but also the extent of poverty of the poor. There is also increasing income inequality.
The removal of exemption and the resulting levy of 5% GST wef 18.07.2022, is analysed in the above background.
The next section details the contours of the levy, followed by status and working of the GST council in the third section. The fourth section evaluates the levy in the background of principles of taxation. The present analysis adopts data from government sources.
2. Details of the GST levy due to removal of exemptions
Starting 18.07.2022, the removal of exemptions has resulted in levy of Goods and Service Tax (GST) @ 5% (2.5% IGST and 2.5% SGST) on ‘pre-packaged and labelled’ food items including rice, murki (puffed rice), wheat, wheat flour, pulses, curd, lassi, butter milk, all types of jaggery (gur), etc. (specified items falling under Chapters 1 to 21 of the Tariff, notified vide No. 6/2022-Central Tax (Rate), dated 13.07.2022 [https://cbic-gst.gov.in/pdf/central-tax-rate/07_2022-ctr-eng.pdf], and corresponding notifications for SGST and IGST). These will be applicable to packages containing quantities up to 25 kg (or 25 litres). Accordingly, packages with quantities more than 25 kg (or 25 litres) would not be subject to GST.
The background to the increase is acceptance of the recommendations of the GoM on rate rationalization,[3] by the 47th meeting of the GST Council, held on 28/29.06.2022 at Chandigarh. [4]
Rates of GST
Presently, there are four GST rates 5%, 12%, 18%, and 28%. The 480 items in the 18% rate account for around 70% of GST collections. There are few items exempt from GST (0%), including unbranded and unpackaged food, a fast decreasing list. There is an additional cess @ 12% on select aerated/fizzy drinks, making the effective GST rate 40%. Suggestions in the GST Council indicate that new rates of 3% and 8%, maybe introduced. Some items from the 5% rate will be shifted to 8%, as part of a rationalisation exercise. Some/all of the hitherto exempt items may also shift to other/higher rates.
GST was envisaged as a single rate GST, with some exemptions, and a higher tax for sin/demerit items such as luxury cars, aerated beverages, paan masala, tobacco and tobacco products. Table 1 below shows that most economies levy a single rate GST, which (single rate GST) was touted as one of the plus points at the implementation stage.
The need/basis for levying GST on ‘pre-packaged and labelled’, as per TRU FAQ dated 17.07.2022 is
`Certain representations have been received seeking clarification on the scope of this change, particularly in respect of food items like pulses, flour, cereals, etc. (specified items falling under the Chapters 1 to 21 of the Tariff),’
However, there are no details of – who made them?, reasons/ justification for the same, and likely impact on sections of the society, including the poor/ consumer. Ideally, such a proposal should have had wide ranging discussions, since they were likely to impact prices of food articles and consumer.
Merely, stating that there was consensus is inadequate, and does not stand tests of principles of taxation. Given the present composition of the state governments, majority/consensus is a foregone conclusion, as explained later in the discussion.
Past experience of decisions (with consensus) suggest that rationalisation exercises are aimed at increasing revenue for Central/State governments, by including new items or shifting items to higher rates. Items shifted to lower rates are those benefitting large players, because of the inability to fully avail Input Tax Credit (ITC) on requests (read as lobbying/pressure) from undisclosed producers/associations.
The removal of exemptions and the resultant levy of GST on ‘pre-packaged and labelled’ goods, has the potential to benefit, prominent brand owning large producers, who while sourcing from smaller producers, can now avail ITC. In a scenario (pre removal of exemptions and levy of GST) where the small producer paid no GST, the prominent brand owning large producers could not avail of ITC. Previously, these prominent brand owning large producers may have been sourcing from smaller producers/traders, restricting the option to avail ITC. However, there is larger impact on sale to consumers other than for prominent brand owning large producers, that should have also been considered. Even in the envisaged benefit, there is no explanation as to how the smaller producer will avail of ITC.
Further, in an interview of the Revenue Secretary states
`Q There has been a huge uproar about the removal of GST exemptions on many household items. Will there be a review of the decision?
A First, let me explain the issue of packaged food items. Many prominent brands, I do not want to name, had given up actionable claims on their brand to avoid taxes. There was an arbitrage created. The industry had also written to us. States had also pointed out about the revenue loss because of this situation. A number of these items were taxed in states under the value-added tax regime. States were completely for this (removing exemption)’
Simple reading of the reply raises the following issues
i. If brands are giving up actionable claims can there be a revenue loss?,
ii. If there were actionable claims given up and an arbitrage created, the same would now shift to smaller producer and not disappear,
iii. How would the problem be addressed for the smaller producer?,
iv. One of the reasons for adopting the GST was it would subsume several taxes, which happened on 01.07.2017. Citing levy of taxes under VAT prior to that by some states,[5] cannot be a valid justification for removing the exemption and so levying the GST.
v. The list of the number of states and associated revenue loss, seeking removal of the exemption has not been shared. Revenue loss with reference to pre 01.07.2017 situation is a weak argument,
vi. There is no rationale given for exempting packages with a quantity more than 25 kg (or 25 litres) from GST.
3. Status and working of the GST Council
The GST Council set up in 2016 under Article 279A (1) of the Constitution, to implement GST, is the highest decision-making body for the indirect tax regime in India. It is headed by the Union finance minister and comprises finance ministers/other representatives of States/Union Territories. The secretariat of the GST Council is in New Delhi.
The recommendations of GST Council require three-fourth majority of members present and voting. The central government’s vote counts as one-third, while the weightage of the states’ total votes are two-thirds. Given the present party (same as centre) heading the state governments, a three-fourth majority is a foregone conclusion. State governments have at times complained of the lack of discussion, on the long-list of agenda items/papers in the GST council. [6]
Supreme Court of India in a Judgment dated 19.05.2022, in CA No. 1390 of 2022, Union of India vs. Mohit Minerals held that GST Council’s recommendations are not binding on the government. The apex court added that the Council’s recommendations will have a “persuasive value" and that both Parliament and the state legislatures can equally legislate on the matters related to GST.
4. Evaluation of the proposed levy in the background of principles of taxation
In the seminal work of Wealth of Nations (1776), Scottish Economist Adam Smith[7] argued that taxation should follow four principles of fairness, certainty, convenience and efficiency. Fairness, in that taxation, should be compatible with taxpayers' conditions, including their ability to pay in line with personal and family needs. The four principles are
i. The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.
ii. The tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor, and to every other person.
iii. Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the contributor to pay it.
iv. Every tax ought to be so contrived as both to take out and keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the state.
An evaluation of the above principles follows, starting with the first
i. The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.
The ability of a citizen to pay taxes is dependant on keeping his/families, body and soul together, in a healthy manner and stay fit, to eke out a decent living. This ability can be benchmarked against a norm (poverty line) or changes in comparison to previous year income. The ability of a citizen to pay is evaluated in the light of the following two indicators.
a. Income (measured as the per capita GDP of India)
Table 2 below gives the level and growth rate of GDP/Per Capita GDP.
Pre-Covid, the level of Per Capita GDP at 2011-12 prices (proxy for per capita income) was ` 108,247 in 2019-20, which decreased by (-) 7.6 percent to ` 100,032 in 2020-21. Despite an increase by 7.6 percent in 2021-22 (which are provisional estimates), it is still lower than the level of 2019-20. The citizen is poorer in 2021-22 when compared to 2019-20. It is observed that even though the Per Capita GDP of a citizen decreased, there was an increase in his tax liability.
The increase in 2021-22, however, camouflages several aspects, which have the potential to further depress the income of a citizen. These are
a. Total loss of earning during the period of lockdown of 54 days [8]. This loss has been borne largely by the informal/low wage earning sector/labour,
b. Continued loss of work/employment and wages even after lifting of lockdown,
c. Given the fact that a large proportion of household expenditure is on food, there would have been a reduction on this (food expenditure) and associated implications. Food prices increased by over 12 percent, implying a proportionate reduction in (food) consumption,
d. Additional expenditure on medical treatment related to covid, which should have been borne by the Central government, who garnered revenue in the name of cess,
e. The NFHS-5 (for 2019-20) reported decline in nutritional status of children under 5 years (compared to 2015-16) and higher anaemia among women compared to men. (NFHS-5 for 2019-20). This decline in nutrition of children under 5 and higher anaemia among women, would also have worsened in 2020-21, due to the continued decline/stagnant Per Capita GDP, and the fact that during the lockdown Aanganwadis were closed,
f. Increase in income disparity in the covid/post covid period, due to several factors including digital divide, formalization of several sectors of the economy, having the potential of a sharper decrease in the Per Capita GDP in the informal/ low wage earning sector/labour,
g. Regular increase in the prices of Petroleum, Diesel, Cooking Gas, etc.
It is observed that not only has the stagnant Per Capita GDP of a citizen accompanied with increases in tax liability, there was an increase in the cost of several items of consumption of the informal/low wage earning sector/labour, which would have reduced his food consumption and/or increased his indebtedness.
As per RBI, Household debt to GDP ratio, which has been steadily increasing since Q1:2018-19 (31.3 percent) rose to 35.4 per cent in Q1:2020-21 and sharply to 37.1 percent in Q2:2020-21.
(Reserve Bank of India Q2:2020-21 Estimates of Household Financial Savings and Household Debt-GDP Ratio, RBI Bulletin March 2021,
b. Inflation especially food inflation
Table 3 below gives the level and inflation rate of WPI, CPI (IW) and GDP Deflator.
RBI band for inflation of 4 ± 2 percent for the previous five years, has been retained for the period April 1, 2021, to March 31, 2026, under the Reserve Bank of India Act, 1924. This is despite the fact that the same was breached in 2020-21 and close to the upper limit in 2019-20 and 2021-22. Amongst other things, this has the potential to reduce earnings for those dependant on interest incomes.
An important finding by comparing the GDP Deflator with the Inflation rate, is that the former is very much on the lower side, implying that GDP at constant prices is overvalued. This indicates that the Per Capita GDP estimates are lower than those reported.
In terms of inflation also the citizen has borne the impact of price rise beyond the reported numbers, limiting his ability to bear additional burden of taxes.
The consumers of food articles including rice, murki (puffed rice), wheat, wheat flour, pulses, curd, lassi, butter milk, all types of jaggery (gur), etc. have relatively limited ability to pay the increased price due to the levy of GST. The likely increase is given in table 4 below
There could be additional costs that the trader may choose to pass on to the consumer to cover costs of administering the GST levy.
The above suggests that the removal of exemptions and the levy of GST is not in consonance with the principle of ability `of the subject to contribute’
ii. The tax which each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor, and to every other person.
The individual has been subject to at least the following uncertainties
a. Unlike pre-GST times, when changes in tax rates were levied largely at the time of the budget (Centre and/or State), in the post-GST times, changes in the GST rate can happen at any time, including at the time of the budget,
b. The present removal of exemptions and the levy of GST, would raise ` 15,000 crore [9] all of which will be borne by the poor (low and middle income),
c. Price for non-subsidised LPG has been raised from ` 706.5 wef 01.04.2019 to ` 1003.0 wef 19.05.2022, an increase of 42 percent. There are several other examples,
d. The individual can be surprised by the levy of a tax as happened with the removal of exemptions and the levy of GST,
e. As stated earlier that the GST levy will be applicable to packages containing a quantity up to 25 kg (or 25 litres). Accordingly, packages with a quantity more than 25 kg (or 25 litres) would not be subject to GST. The burden would be borne only by the poor.
iii. Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the contributor to pay it.
Clearly the removal of exemptions and the levy of GST, does not appear to have been leviedat a time, or in a manner, which was convenient to person paying the same. On the other hand, this was a time to reduce his tax, to increase his income/ disposable income,
iv. Every tax ought to be so contrived as both to take out and keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the state.’
On this principle, the poor appear to the bearing the entire burden, while the rich are not subjected to levy.
To Sum, it is unlikely that this GST levy will be rolled back. However, to bring in equity, an equally important principle of taxation, the GST levy should be made applicable to packages with a quantity more than 25 kg (or 25 litres).
[1] Author has in posts on his website (https://rohitkparmar.wixsite.com/site), twitter (https://twitter.com/rohitkparmar?s=09), facebook (https://www.facebook.com/rohit.parmar.5268750/), linkedin (https://www.linkedin.com/in/rohit-kumar-parmar-841b4724) been writing on varied topics and can be reached at rohitkparmar@yahoo.com. [2] Covid had a health impact, but the lockdown had a severe economic impact. [3] https://gstcouncil.gov.in/sites/default/files/GoM-Dynamic/OM-GoM-on-Rate-Rationalisation_0.pdf [4] PIB release on the GST Council Meeting https://pib.gov.in/Pressreleaseshare.aspx?PRID=1838020 [5] In terms of clarification given by FM, only two states (Punjab and Uttar Pradesh) levied Purchase tax totaling ` 2,700 cr, which were also net supplying (producing) states. The burden of the purchase tax would have been borne by the Central government/FCI. https://www.fortuneindia.com/macro/no-gst-on-rice-pulses-wheat-when-sold-loose-fm/108996 [6] PIB press release cited in the previous foot note gives the long list of items approved. [7] Smith, Adam (1776). An Inquiry into the Nature and Causes of the Wealth of Nations. London: W. Strahan; T. Cadell. [8] National lockdown commenced on 24/25 March 2020. [9] https://www.business-standard.com/article/economy-policy/change-in-gst-rates-may-generate-rs-15k-cr-a-year-revenue-secy-tarun-bajaj-122070100040_1.html
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