Govt plans for rate rationalization on FMCG items to tackle GST Confusion

The Central Board of Indirect Taxes and Customs (CBIC) is putting together a list of things that regularly cause legal issues simply because they are difficult to categorize.

The fitment committee is expected to investigate products that, despite slight composition differences, fall into different taxation bands, complicating tax requirements. This issue is especially common in the fast-moving consumer goods (FMCG) industry, which has recently been the subject of multiple tax investigations.

Read more at: Major FMCG Companies booked for Claiming Fraudulent ITC

According to sources acquainted with the issue, this compilation will be given to the rate reduction committee’s ministerial group at the next Goods and Services Tax (GST) Council meeting.

“A significant issue lies in the classification of some products, and the fitment committee is developing a detailed list of these ambiguous areas that have led to the most legal challenges,” revealed a high-ranking official who asked to remain unnamed.

The official stated that there are approximately 25-30 products and services with classification overlap.

Finance Minister Nirmala Sitharaman has also raised categorization concerns, pushing the board during a meeting with federal and state GST enforcement officers to prioritize fixing these issues.

“The fitment committee is looking into this issue, and its proposal will go before the rate rationalization ministerial group during the next council meeting,” said a government official.

The action was prompted by instances in November of the previous year, when many FMCG businesses producing chips and snacks using the “extruded” process were asked to remit 18% GST rather than 12%, with tax letters demanding payment by March 31, 2024. The extrusion technique, which generates ‘puffed’ or ‘expanded’ treats, is deemed unhealthy due to its high calorie and fat content, as well as low protein levels.

The government declared in August 2023 that extruded snacks should be taxed at 18%, and the Directorate General of GST Intelligence (DGGI) issued notices in response to this direction.

However, the FMCG sector has raised concerns over overlapping classifications for items like as namkeen, fruit-based drinks (both alcoholic and non-alcoholic), flavoured milk, and other processed foods, which frequently result in inconsistent advanced decisions across states.

“One example is bhujia, which has a 12% GST. However, recent manufacturing processes, like as extrusion, which is used to reduce fat content, have complicated the waters, leaving many traditional bhujia makers facing increased tax demands,” said a namkeen manufacturer who requested anonymity.

With no clear definitions, the business has sought clarification from the government, particularly after receiving multiple notices from the DGGI.

As the deadline approaches, the FMCG industry has asked the finance ministry for a resolution to avoid unnecessary litigation and notices.