GST Council meet: GoM pitches for 'specific tax levy' on pan masala, gutkha

Proposes levy on 38 such items in the range of 12-69% of retail sale price

A group of ministers (GoM) tasked by the Goods and Services Tax (GST) Council to look into capacity-based taxation for evasion-prone commodities like pan-masala and gutkha has proposed a “specific tax-based levy”, which is to be linked to their retail prices.

At present, these commodities attract 28 per cent GST plus an ad valorem compensation cess.

The ministerial panel, led by Odisha Finance Minister Niranjan Pujari, has submitted its final report on the issue, and it is likely to be tabled in the GST Council meeting on Saturday. The report, if approved, will help plug revenue leakages in these sectors at both the retailer and distributor end.

The panel observed greater revenue leakages existed at the later stages of the supply chain of such commodities, and since most of the end retailers are small and below the threshold limit for mandatory GST registration, it is difficult to trace them.

Consequently, the panel decided there was a need to move to specific tax-based levies to boost the first-stage (manufacturer level) collection of the revenue. Additionally, such a specific tax shall be linked to the retail sale price to maintain revenue buoyancy, the panel said in the report.

Business Standard has reviewed the panel report.

The panel has proposed the specific tax rates on 38 such items including pan-masala, hookah, chilam, and chewing tobacco, ranging from 12 per cent to 69 per cent of the retail sale prices of these items.

The GoM, in its deliberations, has observed these changes could be made in the compensation cess component of the tax because in the subsequent stages there is no other input tax credit other than the compensation cess paid in the previous stages. 

The panel is of the view that the tax structure for the compensation cess levied on such commodities will be further simplified by reducing the number of tax slabs and associated differential tax rates.

To understand the proposed rate better, let us say tax on a Rs  5-pan-masala packet is Rs 1.46 paid by manufacturer, and Rs 0.88 paid by distributor and retailer. The taxes total Rs 2.34. Under the proposed move, the tax outgo will more or less remain Rs 2.34, (manufacturer pays Rs 2.06, and distributor and retailer Rs 0.28).

Widening the tax base

• Ministerial panel suggests moving from ad valorem tax to specific tax levy
• This will boost the first-stage (manufacturer level) tax collection and curb leakage, it says
• At present, pan masala, gutkha attract 28% GST plus ad valorem compensation cess
• Chewing tobacco, hookah, chilam among items covered

The key difference is that currently the compensation cess, apart from being an ad valorem tax, has different rates for different commodities. In the proposed scenario, the rate will be on the basis of “retail sale price”, which means the maximum price at which these goods in packaged form may be sold to the consumer and includes all taxes.

“Likely the level of specified rates would not lead to an increase in overall tax impact on the consumer. The levy is being proposed only to plug the leakage of GST and compensation cess at the retail and distributor leg,” said Saurabh Agarwal, Tax Partner, EY.

On capacity-based taxation, the panel suggested such a levy was not in the spirit of the constitutional mandate under the GST regime. It noted the current legal framework for GST, including the relevant constitutional provision, provides supply as the taxable event and does not appear to provide authority for a capacity-based levy.

Further, to plug GST leakage for these items, the panel suggested measures entailing the registration of machines; special monthly returns with details of the machine, inputs, clearance, etc; special compliance requirements like mandatory e-invoicing, mandatory e-way bill, mandatory, heavy penal action, among others.

The panel pitched for implementing a “track and trace mechanism” for all the tobacco products, preferably by the end of 2023, while carrying out associated infrastructural, systemic and legal feasibility studies to implement it.