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Relief that there were no nasty year end surprises. The much talked about 35% slab did not happen. One would have to wait for the minutes of the GST council meeting to see if this issue was even there in the agenda. There was also no mention about another pre-meeting concern, namely a discriminatory rate of taxation, in respect of apparels and footwear.
Disappointments were many — so many critical decisions, exemption on life and health insurance products, on rate rationalisation, on compensation cess, the inclusion of some petroleum products, on the GST Tribunal had been postponed. And at the end of the day it was just another typical GST council meeting — lots of recommendations on, rates of goods and services, amendments and insertions in the Central Goods & Services Act (CGST) and Rules, exemptions and clarifications. We await now a host of notifications, circulars and instructions which the Central Board of Indirect Taxes & Customs ( CBIC) will be issuing to give effect to these.
But the GST Council meeting made news for another reason; questions were being raised by many about the very functioning of the GST Council, about the multiple slabs of taxation, the apparent irrationality in the manner in which GST rates are determined. And I speak specifically about the memes and debate which the humble popcorn has generated.
Let me address the last issue first. To refresh our collective memories GST is a destination based tax on consumption of goods. It is a value-added tax levied at multiple stages of production/manufacture/supply up to the final consumption with credit of taxes paid at the previous stages in the value chain available as setoff. Thus value addition at each stage is taxed. Its benefits are universally acknowledged and are too well known to bear repetition. This is why we adopted it — and even carried out a Constitutional amendment to ensure its implementation.
All goods or services have to be given a name, to be classified. This is necessary to determine the applicable rate of tax. The Harmonised System of Nomenclature (HSN) is an internationally accepted system of categorising goods in a systematic manner. It is developed by the World Customs Organisation ( WCO ) and updated periodically.
The GST tariff in India has been adopted on the basis of the WCO nomenclature with changes to meet Indian requirements. It categorises all goods suppled within the country. It consists of 21 sections, 99 chapters, 1,244 headings, and 5,224 subheadings. Each section is divided into chapters, chapters into headings, and headings into subheadings. Each section groups related products, making it easier to locate and classify items accurately. As an aside it may be mentioned that similarly for services, we have the Services Accounting Code (SAC). What the HSN code and the SAC ensure is the proper identification of a particular good or service. GST tax rates are indicated against a particular HSN or SAC .
In this background let us examine the popcorn issue. The press release says that ready to eat popcorn mixed with salt and spices are classifiable under HS 2106 90 99. This chapter deals with miscellaneous edible preparations – popcorn of the type mentioned being classified as ‘other’ the omnibus miscellaneous heading. If this is supplied other than pre-packaged and labelled the rate is 5%. But if it is packaged and labelled, which means a definite value addition, the rate changes. This is in the scheme of GST. Where the popcorn has added sugar or caramelised, it obviously is no longer a salty/spicy product. Its classification changes to Chapter 17 of the HSN/GST tariff, to a sugar confectionary.
Since all sweetened products have a higher rate in the GST tariff to discourage unhealthy binging, the rate recommended for such caramelised popcorn is 18%. The total revenue implication in this will I suspect be just about ₹100-150 crore, which in the scheme of things where the annual gross GST revenue is about ₹20 lakh crore, a pittance. An exemption for all types of popcorn could have been considered . That is a policy call-but the decision regarding the classification and rates is correct and did not merit the frenzied reaction – this was terrorism of the ill-informed!!.
There have also been questions raised about the very functioning of the GST Council. Getting the consensus of 28 states on fiscal matters is challenging. Despite this all decisions thus far spread over seven plus years and 55 meetings of the Council have been by consensus-this is a remarkable achievement .One could question the deferment of issues -but again perhaps this is the only way to ensure there is proper debate and thrashing out of concerns and reaching an agreement.
The issue of multiple slabs in the GST regime has been discussed ad nauseum. Tax experts and industry raise this issue repeatedly. The tax administrator would be delighted to have a single rate -this will ensure there is no issue of classification and across the spectrum of the tariff spread over 99 chapters , the rate will be the same. But is this practical in a diverse country like ours? And if we were to have a single rate we should not forget it would be in the region of 16%.
Again this would be possible only if the industry which keeps clamouring for exemptions, so inimical to GST as it breaks the value chain , is prepared to give up the exemptions. We should not lose sight that the result of all these exemptions is that the present average rate is about 11.5 % -and if GST revenue continues to do well it is because of multiple factors including inflation.
These issues have pushed from the lime light several critical recommendations of the Council. Recommendations to make some decisions effective retrospectively from 2017, recommendations nullifying Supreme Court decisions, recommendations to carry out multiple amendments of the CGST Act and Rules. A new much needed Trace and Track mechanism has been recommended for specified evasion prone commodities. There should have been debate on these issues rather than popcorn!
All tax administrations should undoubtedly aim for Adam Smith’s prescription for a good system of taxation marked by simplicity, certainty, efficiency. This calls for a close partnership of the tax administration and the tax payer (Adam Smith called them shareholders). This will take time and effort— and an appreciation of each other’s concerns. And now that I have explained the logic about popcorn, ‘I do hope everybody’s day is filled with sweetness and crunch, just like caramelised popcorn’!
— The author, Najib Shah, is former Chairman, Central Board of Indirect Taxes & Customs. The views expressed are personal.
Read his previous articles here
