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BW Businessworld

GST On Pre-packed Items: A Curse For Indian Middle Class

Headed by Union Finance Minister Nirmala Sitharaman, the panel consists of representatives of all states and union territories

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The GST Council has recently decided to place a 5 per cent goods and services tax (GST) on pre-packed and labelled items like meat (except frozen), fish, curd, paneer, honey and dried leguminous vegetables, dried makhana, wheat and other cereals. 

Similarly, an 18 per cent GST will be levied on fees charged by banks for the issue of cheques (loose or in book form). Maps and charts including atlases will attract a 12 per cent levy. Goods that are unpacked, unlabelled and unbranded will continue to remain exempt from GST.

The Confederation of All India Traders (CAIT) quickly jumped into the conversation and said that Indian traders are against the recent decision of the GST council to levy 5 per cent GST on pre-packed and pre-labelled foodgrains, curd, butter milk etc.

The trade body has appealed to the GST Council and Union Finance Minister Nirmala Sitharaman along with state finance ministers to withdraw the decision. CAIT proposed the discussions with the stakeholders to move forward. 

The experts also noted that the GST hike on a few of the unbranded products are definitely going to raise the price of products that are consumed by the lower segments of the pyramid and hence will hurt consumption. 

Also Read: Inflation And Falling Currency: The Saga Continues

"While this policy announcement will be able to boost the tax collections of the government, for the general public it may have come at the worst possible time when a large segment of the population is fighting high inflation. Even as a significant part of the high inflation is supply-constraint led, the RBI has no option but to tighten monetary policy in order to keep the inflation expectations in check and hence reduce the chances of future inflation remaining high," said Indranil Pan, Chief Economist, YES Bank.

According to data, the weighted average GST rate has decreased to 11.6 per cent as compared to 14.4 per cent at the time of launch and hence GST rate rationalisation is crucial to enhance the numbers. 

Also, the council has recommended a correction in the inverted duty structure for items like coal, edible oil, LED lamps, printing, drawing ink, solar water heater and finished leather. 

"The 5 per cent GST rate will see a one-off increase in the prices of these products, although by less than 5 per cent since producers and sellers will also be able to claim input credits and competition will constrain the ability to pass on the full cost to consumers," said Prasenjit K Basu, Chief Economist, ICICI Securities.

Pradeep Multani, President, PHD Chamber of Commerce and Industry said that the GST rate on certain basic food items, which were initially exempted from the GST structure i.e. kept under ‘Nil Tax’, is likely to increase the cost of the basic consumption basket of the households. This would have an impact on demand in the economy and is likely to increase the inflationary. 

For the central government, GST in recent times has been fruitful. However, experts argued that essential food grains have been taken under GST at a time when government collection is increasing every month. 

The GST revenue for the month of June surged by 56 per cent year-on-year to nearly Rs 1.45 lakh crore as against Rs 1.4 lakh crore in May. Finance Minister Nirmala Sitharaman while revealing the numbers for June said that monthly collections are now not going below the figure of 1.4 lakh core.

The CGST revenue stood at Rs 25,306 crore, SGST at Rs 32,406 crore, IGST Rs 75,887 crore and the GST compensation cess at Rs 11,018 crore.

The total revenue of the centre and the states in June after regular and ad hoc settlement stood at Rs 68,394 crore for CGST and Rs 70,141 crore for SGST. 

For June, the gross GST collection was the second-highest collection after April. "The collection in June 2022 is not only the second-highest but also has broken the trend of being low collection month as observed in the past,” the government said in a statement.

The government attributed the robust collections to economic recovery, anti-evasion activities and especially action against fake billers.

While questioning the requirement to bring food items under the tax slab of 5 per cent, CAIT alleged that the decision will benefit big corporate houses at the cost of small manufacturers and traders. This will have a negative impact not only on trade but also on the agriculture sector, the trade body said. 

While condemning the decision, BC Bhartia, National President and Praveen Khandelwal, Secretary General, CAIT in a joint statement said the move will have multiple effects on the food grain traders and will load the citizens with an extra financial burden. 

An average Indian household is dealing with high inflation. India's annual wholesale price-based inflation rose to a record 15.88 per cent in May, as compared to 13.11 per cent in May 2021, said the Ministry of Commerce and Industry.  At 15.88 per cent, the WPI inflation print for May is the highest in the current series, data for which is available starting April 2013.

Also Read: Normal Monsoon To Bring Down Inflation In India: Experts

"Given the impact of rate hikes, some softening in global commodity prices, and a favourable monsoon, inflation trajectory should turn more comfortable by end-FY2023 or early-FY2024," said Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities. 

Rakshit, however, said that the GST rate hikes on consumer goods are only on pre-packed and pre-labelled goods. For mass consumption, these are typically sold in bulk and in unbranded/unpackaged form. We do not expect a significant impact on inflation due to this. 

Although, experts told BW Businessworld that normal monsoons will be an important factor in cooling off inflationary impulses across cereals and short-cycle crops such as vegetables. Also, the retail inflation for farm and rural labourers increased to 6.67 per cent and 7 per cent, respectively in May. 

"Inflation is expected to start softening in the coming quarters on the back of diminishing unfavourable base effect, particularly in food articles and liquidity drain as RBI has increased the repo rate by a significant 90bps recently (40bps in May 2022 and 50bps in June 2022), along with the government taking calibrated steps," added Multani. 

Also Read: India Is Facing Imported Inflation: Experts

Economists are betting big on monetary tightening that is expected to have an impact on consumer demand and resultant price corrections in the various goods and services in both consumption and wholesale segments.

"We think that inflation is past its peak. While the RBI is likely to continue with its tightening bias and cool inflation expectations, the government has also stepped in with its measures to cool inflation. The ban on wheat exports, reduction in the customs duties on edible oil etc are seen to have brought down the prices of these essential commodities on the food side," said Pan. 

In India, the important aspect that determines food inflation is the monsoons as it is necessary for Kharif crops. The India Meteorological Department (IMD) has revised its monsoon forecast to 103 per cent of the long-period average (LPA) from the previous estimate of 99 per cent of LPA. The pace of monsoons has picked up which is likely to help inflation cool down.

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