While the entire nation is still struggling to overcome the adverse effects of Covid-19 on the economy, will the introduction of GST on unbranded food items such as cereals and pulses come as another blow?

One way to justify the imposition of the tax on food items is that it will result in free flow of input tax credit, thereby, reducing its price to the end-customers. However, how far this change will actually impact the end-customers is something to watch out for in the near future.

Earlier, GST was levied on everyday essentials such as pulses and cereals only when they were branded and packed in unit containers. No GST was levied when these items did not bear the brand name, or the brand name was forgone subject to specified conditions.

The recent move to levy 5 per cent GST on pulses, cereals, etc., has removed the distinction between branded and unbranded items. What’s the intention behind introducing this change?

From the press release explaining the recommendations made at the recent GST Council meeting, it is quite clear that the intention of the government was to levy GST on retail packages, whether branded or not. However, the implementing notification talks of GST on such items which are ‘pre-packaged and labelled’.

Now, GST would be applicable in case the package satisfies the following two conditions: the definition of ‘pre-packaged commodity’ as defined under Legal Metrology Act, 2009 (LM Act); and the package of the commodity or a label on such package bears the declarations under the LM Act and rules.

The expression ‘pre-packaged commodity’ has been defined under the LM Act to mean a commodity which without the purchaser being present is placed in a package, whether sealed or not, so that the product contained therein has a pre-determined quantity.

Thus, it becomes crucial to read both the Acts together, which gave rise to certain issues.

Also, a couple of hours prior to the date of implementation of changes, the government released FAQs. Let us discuss the changes in detail:

Retail packages of up to 25 kg/litre are clearly under the ambit of GST.

Packages of above 25 kg in quantity: Plainly, the definition of pre-packaged commodity covers these packages as well. However, the point to ponder is whether these packages are required to bear declarations under the LM Act and rules or not.

Retail packages of more than 25 kg are specifically exempt from making declarations under the Packaged Commodities (PC) rules, and hence it is reasonable to assume that it would not attract GST.

As regards wholesale packages, the declaration requirements are provided under Rule 24 of the PC rules. The FAQ has clarified that such packages are not subject to GST. Nevertheless, FAQs do not clearly elaborate on the applicability of Rule 24 of PC rules.

It would be interesting to see as to what extent the FAQs can be relied upon, especially as the notifications in the taxing statue have to be construed strictly and not loosely.

Sale to industrial and institutional consumers: The PC rules grant exemption from declaration in the case of sales made to industrial and institutional consumers which are meant for use by them and not for re-sale or trade purposes.

Though the declaration required to be made on retail packages are exempted for such packages, these packages require a special declaration, ‘Not for Retail Sale’. Thus, whether such declaration would be considered as a declaration to be made under the PC rules for the purpose of GST notification will have to be analysed.

The FAQ has clarified that no GST is applicable in such cases. But scope of the declaration “not for retail sale” with respect to the GST notification has not been explained. In other words, there seem to be gaps between the GST notification, the PC rules and some of the provisions of the LM Act which could lead to confusion in interpretation and implementation.

Importance of understanding the term industrial and institutional consumer: From now on, for taxing of supplies of cereals and pulses, it becomes essential to identify as to whether such supplies will qualify as supplies to industrial/institutional consumer. To illustrate, can the packer who buys these items from the manufacturer for further packing in retail packs can be said to be covered under industrial consumer and such supplies can be said to be exempt?

Similarly, will supplies made to government agencies, hospitals, schools, etc. qualify as supplies made to institutional consumers and thus, exempt? One may find a body of decisions addressing the term “institutional consumer” under erstwhile tax law, yet, placing reliance on them may be difficult, as the term itself has undergone change of meaning in the recent past.

Way forward

A single notification had got the industry worried. Now, since most of the doubts have been clarified by FAQs, is it safe to assume that interpretation of the notification would be litigation-free? Certainly not.

The legal sanctity of the FAQs will have to be seen in due course, as these have not been issued under any specific legal provisions. One hopes the government amends the notification itself to bring it in line with its intention to put all disputes to rest once for all.

Mehta is Partner, and Garg is Associate, at Lakshmikumaran & Sridharan Attorneys