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Thursday, February 21, 2019
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High GST on F&V Products – A Bane or Boon

At a time when we talk about ‘doubling farmers’ income’ and ‘make in India’, high GST on fruits and vegetable products is a regressive step and may give a wrong signal. Government must correct it quickly before it is too late.     Dr Subodh Jindal

 

Introduction

‘Goods & Service Tax’ is a landmark reform in Indirect Taxation system in the country. It has kindled the hope for a better future. The industry congratulates the Government for this bold initiative and welcomes the new tax platform.

The Prime Minister has also on several occasions urged to address concerns of the common man and poor farmers through GST. However, while going through the fine print, a number of issues have emerged which need to be examined carefully and resolved.

Unrealistic GST

The announcement of productwise GST rates in regards to food processing industries has come as a great surprise and disappointment. The industry has been pursuing with the government for a long time for realistic fitment of GST rates for food products.The Ministry of Food Processing Industries had prepared a comprehensive list of GST rates of food products drawn as per the HSN System.

However, it appears that there has been a communication gap. Even the assurance repeatedly given by the Finance Minister that GST rates will not exceed the current tax incidence on food products has not been maintained.

Various anomalies have been found in GST rates e.g. wheat, rice, maize, jawar, bajra, atta, besan, maida etc. have been placed at 0% when sold loose and are taxed when put in a package and carry a name identity.

This is contradictory to the culture of hygiene and food safety. Shelf life considerations and protection from environmental hazards necessitate packaging of food. We cannot incentivize unsafe food by taxing packed food.

What is most worrying is that no consideration has been made of the extreme perishable nature of fruits and vegetables which are lost to the tune of Rs.30,000 crores annually. This value would be incomparably more than the total revenue of the sector.

India leads globally at the first, second or third position in the growth of most fruits and vegetables but we process a meager 2% to 4% as compared to 40% to 80% in many countries. Surprisingly, fruit and vegetable products like pickles, chutneys, murrabas, sauces, pulps, pastes, juices, squashes, jams, etc. have been placed at high tax levels of 12% or 18% instead of the recommended and appropriate 0% and 5% level.

Adverse Impact on MSME

More than 95% of Food Industry in the country is in the MSME sector which will be adversely hit under GST because this sector was working under Rs.1.5 crore ‘Manufacturing Threshold’ which has been reduced to Rs.20 lacs under GST.

Therefore, tax burden will begin very early. Let us take the example of Fruit/Veg Pickle manufactured by a MSME unit. Since there is no tax on raw materials being from agriculture, there is no Input Tax Credit, except for a minor contribution from packaging of about 0.5%–1.5% (say 1%).

The average VAT is about 5.5%. There is no incidence of CST as the product is sold within the State. The total tax incidence is therefore, 1% + 5.5% = 6.5%. The proposed 18% GST rate on Pickle is an increase of more than 11%. The situation is the same with other products such as Fruit & Veg Chutney/Murraba/Sauce/ Pulp/Paste/Juices/Squash/Jam etc. Such a huge rise in tax is a killing blow for MSME Food Industry.

It is important to mention here that the perception that these items are luxury is not correct because a counted few big brands in these items may be expensive but their produce is not even 0.5% of the produce of lacs of MSME units which is at half the price.

Food Inflation

High taxes increase food prices causing severe inflationary effects. It is important to keep taxes on food products as low as possible to avoid social repercussions. Food needs to be treated as a means of social fulfillment very much like health and education. Food constitutes 50% to 60% of common man’s expenditure basket. High taxes increase food prices causing severe inflationary effects.

Taxing preservation/processing of agri produce is a huge deterrent to farm economy and sustenance of poor farmers. It is also contrary to the principles of taxation. When the raw material is at 0% tax, the tax charged on the product will be unfair tax on the consumer. It is a fact that processing is a bridge between the farmer and the consumer and if it is taxed, both will suffer. It appears that India is losing a great opportunity to provide thrust in saving perishables through processing. Global data on GST/VAT rates shows that 74% of food products are levied at 0% or less than 5% tax levels.

Conclusion

The fitment of GST rates in the Fruit and Vegetable sector is definitely not in line with the Prime Minister’s vision of promoting agricultural economy and doubling the income of farmers. We are still leagues behind the world in understanding that processing of agri-produce is not a luxury. This perception needs to be changed. Tax rates for Fruit and Vegetable products under GST should be revised and a realistic decision should be taken in view of the ground realities. We cannot afford to be perception driven.

(The author is the president of AIFPA. Views expressed are personal.)