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Behind the fuss regarding GST on necessities: two sides of the same coin

The GST council, in its 47th meeting, recommended a 5% fee on some necessary products like pulses, rice, cereals, and so on, when delivered as “pre-packaged and labeled” items. These modifications will take effect on July 18, 2022.

Previously, these things were only liable if they were sold under a brand name and packed in a unit container. The distinction between branded and unbranded products has now been eliminated, including all pre-packed and labeled items under the GST net, even if they are unbranded and lack a unit container. It is important to note that this modification only applies to pre-packaged commodities that fall within the definition of “pre-packed commodity” in the Legal Metrology Act of 2009.

The imposition of GST on vital products like pulses, grains, and rice has sparked concern that it may raise costs and harm the common man. This point of view is becoming increasingly important, especially given the present economic scenario of the excessive inflation in gasoline and everyday necessities, which has impacted the household budget.

The following aspects are worth mentioning in this context. To begin, these modifications only apply to commodities regulated by the Legal Metrology Act, where the majority of the items in issue are currently sold under the brand name upon payment of GST. As a result, unlike the recent windfall tax on gasoline, it is unlikely to result in a major increase in revenue collections. On the contrary, the Hon’ble Union Finance Minister highlighted that there were worries about income leakage since some enterprises were abusing the implied term for unlabeled food goods by failing to register them. This is what prompted the decision to end the exemption and bring pre-packaged and labeled food goods inside the GST net.

The following aspects are worth mentioning in this context. To begin, these modifications only apply to commodities regulated by the Legal Metrology Act, where the majority of the items in issue are currently sold under the brand name upon payment of GST. As a result, unlike the recent windfall tax on gasoline, it is unlikely to result in a major increase in revenue collections. On the contrary, the Hon’ble Union Finance Minister highlighted that there were worries about income leakage since some enterprises were abusing the implied term for unlabeled food goods by failing to register them. This is what prompted the decision to end the exemption and bring pre-packaged and labeled food goods inside the GST net.

She further said that only the mechanisms of imposing GST on these commodities have changed, with no change in GST coverage except with two or three categories.

Second, any modifications to the GST may only be adopted with consensus from the Center and states, based on a well-defined mechanism in the form of GST council recommendations. As a result, it is not a unilateral move, but rather one based on a greater consensus. Thus, when viewed through this lens, the opposition from state governments is quite unexpected. Recently, Kerala’s Hon’ble Finance Minister stated that his state does not intend to charge GST on vital products sold in one to two Kg packs by small stores.

Any such exceptions will ultimately distort the overall framework of the GST, making it even more complex and increasing the likelihood of disputes and litigation.GST has been in effect for five years, beginning in 2017. Overall, it has united the country as a single market, however, there are still numerous concerns that must be solved.

The reform of the GST system has long been on the Government’s agenda. Through several changes/amendments over time, the government has demonstrated considerable agility in meeting the needs of companies.
One issue that has yet to be solved is the numerous slab rates; keep in mind that there are no simple solutions. Given the context of how GST emerged from the old Sales Tax / VAT, Central Excise and Services Tax, the present system includes numerous slab rates against the backdrop of the Revenue Neutral Rate (RNR) of roughly 15.5 percent. Many commodities, including services, presently come under the 18% slab rate. Some everyday products, especially branded and labeled goods, now come within the 5% slab rate, whereas there are other things where no GST is levied/collected.

Furthermore, we should not forget that expanding the tax net will continue to be a struggle for the government until a significant majority of society is included in the tax net and follows the law in both letter and spirit. This is demonstrated by our country’s pitifully low tax-to-GDP ratio. Unless and until this happens, it would be difficult to cut direct tax and GST rates and simplify the GST slab rate structure.

It is not a simple effort to simplify fiscal law in a country as vast as India, with various stakeholders. As a result, it will be a long and slow journey filled with conflict. But, most likely, that is how a large and vibrant democracy operates.

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