Government’s plans for rolling out GST, the new single-tax reform from July 1, seem to have failed to impress the food processing industry with rates prescribed for some categories being as high as 18% and 28%.

Industry plea rejected
Terming the move as ‘bad treatment’ of the food processing industry by the government, insiders point out that these high rates are in contrast to those prescribed and presented by them to minister of food processing industry Harsimrat Kaur Badal. The rates were rejected by ministry of finance and industry outright.

Inflation feared
While the reasons for finance ministry not accepting the demands were not known, the industry strongly felt that the move would lead to inflation.

Shubham Chatterjee, VP, business research, Avalon Global Research, described it thus, “When GST is implemented, processed food segment will see an increase in tax on many items like ready-to-eat snacks from 12% to 18% and ghee from 5% to 12%. This would lead to producers passing on some of the cost increase to consumers which will push demand for discretionary products down in the near term.

However, the overall impact on the industry will be known as classification of products in different tax slabs becomes clear.”

Further, not only the rates fixed by GST Council but the taxing of branded and packaged items while exempting loose ones has also made the industry worry. Experts feel that this is against the wishes and mandate of the FSSAI which is making efforts for ensuring safe and nutritious food. For instance, open atta, besan, fruits and vegetables are at nil rate but the moment they are packed and branded, tax is applicable onto them. This would lead the customers to opt for open and unverified products. Hence it is felt that safe or packaged food should be cheaper or subsidised to create culture of safe food.

Some of the experts are of the view that the whole concept is against farmers and agriculture as government, by taxing processed foods, is trying to discourage storage and preservation. Also crops are seasonal and are to be preserved so that they are made available round the year. By taxing preservation, government will harm farmers as there will be no incentive to store or preserve and thus during harvesting period, the crop will get less price due to glut. It is not only limiting to MoFPI but the agriculture ministry as well.

According to them, it is not rational and against the basic principles of GST/VAT to tax items at 18 or 28 % if the basic raw material is at 0 % because in that case the raw material which you want to keep at exempt or at 0% get taxed at 5,12,18 or 28%. So you lose the impact and purpose of keeping it at 0%.

Additionally, these items will have very less input tax as raw material is at 0%, so consumer will be unfairly taxed along with the farmer. Also comparing processed food (essential item) to luxurious item (28%) is unfair, illogical and irrational, the experts added.

Another point of view was that since the raw material of processing industry was farm produce it had to be treated at par with agriculture and basic food. But if processing, branding and packaging are taxed by the government, it would be discouraging to investors.

It is also desired that basis of rates needs to be reconsidered. Experts are seeking a discussion on the importance of processed foods vis-a-vis the logical revenue government should earn and whether this revenue can be used for more useful purposes than processed foods.

Meanwhile, expressing surprise, Piruz Khambatta, chairman, Rasna Pvt. Ltd, states, “GST rates of food products have been a big surprise, as it is not in line with our expectations and recommendations. On the contrary, the rates are much higher by 10 to 15% than current. There will be huge inflationary pressure on industry and also have huge socio-economic ramification.”

He added that certain HSN Number items were taxed between 9 and11% earlier (including 5% Excise and 6% VAT) but now these products are put in 18% category. For example, jams, ketchups, food mixes and so on. While some products like juices were kept under 12% category.

“There would be a 6-7% difference between the current rates and the proposed rates. This would lead to inflation in certain category of items,” he said.

In a similar tone, talking about the impact on the pickles industry, Rajheev Agrawal, CEO, Nilon’s Enterprises Pvt Ltd, Pune, stated that18% GST on pickles would blow a death knell to the industry. At present, he explained, 26 of the 29 states of the country tax pickles at the rate of 5%. Karnataka imposes none, while Rajasthan and Kerala impose VAT on pickles at a higher rate. Add 2% Excise to it and the weighted average of Octroi amounts to 0.1%. That totals to 7.1% tax on pickles at present, which the GST Council intends to raise to a whopping 18%.

He added, “Pickle is a staple food for a very large part of the people of the country. When the prices of vegetables shoot through the roof, many impoverished are compelled to satiate their hunger just with chapati and pickles. The market is so fiercely competitive and price-sensitive that the industry operates with a paltry margin. If the proposed GST rate was implemented, the industry, unable to bear the burden, will be compelled to increase the prices of pickle in the range of 10-14%.”

Percentage rate
Pointing out rate related anomalies, Sagar Kurade, past president, AIFPA, and MD, Suman Projects Consultants Pvt. Ltd, says, “While the food processing industry is happy as such with regard the policy, the concerns, which in many cases are serious, lie with regard to the percentage rate in which food products have been categorised. The industry recommendations were based on the fact that exempt products should be zero (0) rated. Products undertaking primary and secondary processing should be categorised under 5% category while certain premium products such as chocolate may come under 12% category and carbonated beverages under 18% category.

He rued, “Unfortunately we find that most of the processed food products have been brought under 12% and 18% categories. Some of the examples are fruit-based drinks, milk-based beverages, prepared and preserved fruit and vegetables as well as its derivatives ghee, butter etc. Unfortunately the resultant implication of this will lead to increase in prices of most processed foods as well as inflationary impact. Some of glaring discrepancy has been noted in case of pickles, chutneys and sauces which have been put under 28% rate category along with gutka and pan masala.”
Not only food products, but plant machinery, which is basic necessity for the industry, is also put in higher tax bracket. Kurade added, “At a time when need of the industry is to encourage unorganised sector moves into organised sector, packaging machinery has been brought under 28% category (up from 6% excise and 2% CST) and main plant and machinery has been under 18% category (again up from 8%). This will in turn challenge the viability of many food processing projects as well as the global competitiveness of Indian food products in world markets.”

Confectionery industry
With regard to confectionery industry, some of its ingredients and products were kept under higher rates of 18 and 28%.

A representative from confectionery business, says, “Imagine a bakery selling chocolate cake at 28% vs 12 for regular cakes. Exemptions seriously harm all of us. The compounding provision will allow consumption of non-GST paid goods as the establishment does not need input credit. This is very very harmful for the food processing industry as a large amount of consumption actually happens in small eateries whether it is spices, pickle or canned fruit. Compounding provisions should done away with or limited to sale of only Rs 25 lakh per annum. The rate of 28% is absurd.”

Devansh Ashar, partner, Pascati Foods India LLP,  says, “GST of 28% levied on chocolates is a fractional rise for big players who are currently paying VAT+ Excise. However, for small manufacturers, 28% is a significant leap. Till date, small chocolate makers (turnover less than Rs 1.5 crore) applied 13.5% VAT, and from July 1, they will have to apply 28%.”

While it is true that some organisations will be exempt from GST based on its turnover, someone (manufacturer, retailer or consumer) will have to take a hit since the product when sold via a retailer will apply applicable GST. One of the three things could happen. The small manufacturer will absorb difference, affecting their margins, or the retailer absorbs it, which is unlikely, or the MRP of the product is raised to make up for increase in tax.

The offset from cocoa & sugar is only 5%. When manufactured and put on shelf, offset is reduced to about 2% in total. It is not much for small companies but for larger institutions with high turnover it could mean a lot.

The industry expects the ministry of finance and department of revenue to reconsider its fitments vis-à-vis food processing industry.