GST Council meeting: Trace and curb of gutkha firms' tax evasion on agenda

The Goods and Services Tax (GST) Council is likely to take up in its upcoming meeting a group of ministers’ (GoM’s) report proposing strict measures to trace and curb tax evasion by pan masala and gutkha companies, a senior finance ministry official told Business Standard.

The Council had tasked the panel of state finance ministers, headed by Odisha Finance Minister Niranjan Pujari, with examining the feasibility of levying GST on some evasion-prone commodities such as pan masala and gutkha based on the installed capacity of their units rather than actual production.

The ministerial panel, which was constituted in May 2021, has submitted its report and is expected to be tabled in the Council’s meeting in New Delhi on December 17, the official said.

The GoM is said to have listed the pros and cons of taxing such items on the basis of manufacturing capacity, while suggesting that doing so would help shore up revenue. However, the official cited above said the idea of levying tax on the basis of manufacturing capacity might not be considered as it would lead to alteration of the face of the GST, from the current supply-based tax to a production-based tax.

The GoM has also given its views on bringing mentha oil, one of the key ingredients in pan masala, under the reverse charge mechanism. The panel believes that reverse charge would help the authorities in tracing the quantity being supplied to pan and gutkha companies and, hence, determine the final output. Accordingly, these firms can be nudged to pay the tax even if they procure goods from unregistered businesses. 

Experts, however, feel that shifting to capacity-based taxation will be difficult to administer input tax credit (ITC) as wholesalers and retailers don’t operate in a capacity-based mechanism.

“The taxable event for GST levy is supply, and any alteration to the same or including other events such as manufacture as an additional taxable event would bring in more complexity in GST,” said M S Mani, partner, Deloitte India.

Pan masala and gutkha companies, which attract 28 per cent tax along with compensation cess, have allegedly been underreporting their output since the implementation of GST in 2017, leading to a decline in revenues for many states. Sources said these firms pay only one-third of the expected GST as they sell small sachets mostly in cash and, hence, it is difficult for authorities to track their final outcome and total supplies.

In the pre-GST era (old excise regime), such commodities were taxed based on the maximum capacity installed, and not on actual sales or production. GST is being levied on the actual transaction. However, facing a revenue deficit, some states proposed to shift it back to capacity-based taxation for these evasion-prone commodities.

On the table

The GST Council will also take up another GoM report recommending setting up a framework for the GST Appellate Tribunal. The panel of ministers, led by Haryana Deputy Chief Minister Dushyant Chautala, proposed that the tribunal would comprise one president, two judicial members, and one technical member either from a state or the Centre. The report has been submitted.

However, the GoM on taxing online gaming, headed by Meghalaya Chief Minister Conrad Sangma, is yet to submit its report. There is an indication that the matter is unlikely to be part of the upcoming Council meeting, officials said.

Shoring up collections

• GoM submits recommendations on taxing pan masala, gutka on manufacturing capacity
• Suggests taxing mentha oil (a key component of pan masala) on reverse charge basis
• Says this will help trace dealers
• Experts say pan masala, gutka firms pay just one-third of expected GST
• Tobacco items and pan masala attract highest GST rate of 28%