Why GST isn’t always good or simple?

At a meeting with finance minister Nirmala Sitharaman, a Coimbatore-based restauranteur pointed out the difficulties faced by businesses due to the multiple-rate structure under the Goods & Services Tax regime. Saurabh Agarwal explains why the rates on food articles needs to be simplified.

What is Goods and Services Tax?

Good and Services Tax (GST) is an indirect tax in India introduced with effect from July 1, 2017. It has been subject to various amendments as the law got evolved from time to time. These changes include amendment to the tax rates for various goods and services. The GST law stipulates tax rates that range from 0% (exempt) to 28% (excluding cess), based on the classification of the goods and services.

Different GST rates across food articles

GST rates for goods are determined by their respective HSN classification. The following are the GST rates for various every day consumer products:

Atta and Pulses: Unbranded atta is not subject to GST, while branded packed atta has a 5% GST rate.
Vegetable oil: Subject to a 5% GST rate.
Vegetables: Generally not taxed under GST.
Dairy products: Fresh milk that is pre-packaged and labelled is not taxed, ultra-high temperature milk and milk powder have a 5% GST rate, and products like cheese, butter, and ghee have a 12% GST rate.
Namkeen: Taxed at a 12% GST rate.
Biscuits: Unbranded biscuits have a 5% GST rate, while branded biscuits are taxed at 18%.
Bakery items: Bread is not taxed under GST, whereas pastries and cakes have an 18% GST rate.

Updates on GST rates on food products

During the 54th GST council meeting on September 9, 2024, a decision was taken to reduce the GST rate for extruded or expanded products under HSN 1905 9030 from 18% to 12%. The intention behind this change is to align the GST rate for these products with similar food items such as namkeens, bhujia, mixture, and chabena (pre-packaged and labelled) categorized under HSN 2106 90.

It was also specified that the existing GST rate of 5% for not fried or uncooked snack pellets made by extrusion would continue without change.

Other GST-related issues faced by the food and beverages industry

Restaurants in India deal with different GST rates based on their location and services. Here are some examples:
Standalone restaurants, as well as those offering takeaways, are charged a GST of 5% without the option to claim input tax credit.
Restaurants operating within hotels with a room tariff below Rs 7,500 per day, attract a 5% GST rate without input tax credit.
Restaurants in hotels with a room tariff of Rs 7,500 or more per day are subject to an 18% GST rate, but they can claim input tax credit. Furthermore, alcohol sales in these establishments are subject to state-level excise duty and VAT, which are taxes distinct from GST.

Impact on small businesses

Different GST rates on various food products add to the complexity of classification and compliance, including the need to track and record the day-to-day ways of operations by the industry participants. These varying GST rates also present challenges for small businesses that exceed the threshold for GST registration, as they must navigate the intricacies of GST laws and regulations.

Changes required by the industry

GST rates rationalisation is currently a priority for the government, and it is crucial for businesses in the industry to communicate their concerns and submit their representations to the appropriate authorities and ministries. Simplifying the GST rates on food items and related products would help reduce the complexity of GST for businesses.

It would be practical to take a re-look at the current categorisation of GST rates on food articles based on three groups: essentials, convenience, and luxury goods. This is required as the country is moving from developing economy to developed economy which is leading to a shift of food articles between various categories. During the process of rate rationalisation, consideration should also be given to encouraging the adoption of healthier products, processed foods, and fisheries to enhance the competitiveness of Indian products in comparison to those from other countries.