GST effect: Fearing costlier colas, industry seeks differential tax rates

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The GST Council’s decision to cap the cess at 15 per cent over the expected peak rate of 28 per cent on aerated beverages and cars, and varied other rates on sin and luxurious goods has created a flutter in the market.

Though a four-tier rate structure for the new levy has been cleared, the fitments of commodities in these tax slabs would be done after March 31.

While the cess on aerated beverages could spike the retail prices, for some organised players in tobacco industry it may not have much impact. However, the actual impact on prices will be known only after the fitment of slabs for these products. Fearing such a levy, soft drink companies have been pitching for a differential GST structure based on sugar or calorie content. Hit by higher levies in the form of soda or sugar tax in several countries, companies such as Coca-Cola and PepsiCo have made commitments to cut down on sugar content.

Sachin Menon, Head of Indirect Tax, KPMG India, said the upper limit of the cess proposed to be levied on aerated beverages could be a concern for the players.

Adverse effect

Krishan Arora, Partner, Grant Thornton India LLP, said, “Considering the existing indirect tax structure for aerated beverages, which effectively results in a cumulative tax of 39-40 per cent, prices of aerated beverages could be impacted adversely in case the maximum cess of 15 per cent is imposed in addition to the proposed cumulative GST rate of 28 per cent. Creditability of such cess in the supply chain could further aggravate the impact in case the same is not available.” However, the overall impact could be slightly negated by the additional credits that the the industry could earn under GST, he added.

Last November, the Indian Beverage Association had stated that over 80 per cent of the States are taxing such beverages at less than 28 per cent, and urged the government not to put any additional tax burden on aerated drinks. In States such as Punjab, the tax is higher at an estimated 42.85 per cent.

The cess, which would be levied on “water including mineral water and aerated water” that contains sugar or added flavouring, is expected to be levied at around 12 per cent.

The objective is to ensure that the tax incidence under GST on specified sin and luxury goods remains at the current rate and also raises receipts to compensate States for revenue loss.

The cess on tobacco products has been capped at ₹4,170 per 1,000 sticks or 290 per cent ad valorem, while on pan masala it is at 135 per cent ad valorem. The cess will be levied over and above the basic GST that will be imposed on these products.

Amarjeet Maurya, Senior Research Analyst-Mid Caps, Angel Broking, said, “…while the final levy on tobacco products will be high, this cap will ensure two things: uncertainty surrounding the peak cess on tobacco products will end, and this capping also means that they have not exactly been classified as sin products.”

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