12.03.2024: Plan afoot to reclassify items for GST clarity in FMCG sector

The Central Board of Indirect taxes and Customs (CBIC) is planning to prepare a list of products which end up in litigation purely due to classification issues.

The fitment committee is likely to look into such items where there is a minor change in composition but the tax slabs are different, creating confusion in tax liability, mostly in the fast-moving consumer goods (FMCG) sector, which recently attracted many tax notices. 

The list will be referred to the group of ministers on rate rationalisation committee when the Goods and Services Tax (GST) Council meets next, said people aware of the matter.
“Classification issue is a problem with some products and the fitment committee is working on the detail list where there is grey area and which has attracted maximum litigation,” a senior official told ET on condition of anonymity.
There are 25-30 goods and services where there is overlapping of categorisation, the official said.
The matter was also flagged by finance minister Nirmala Sitharaman, who in her meeting with enforcement officials of central and state goods and services tax asked the board to fix the classification related issues on a “priority” basis.

“The fitment committee is looking into the matter and when the council meets next, the proposal will be referred to the group of ministers on rate rationalisation,” the official said.

Immediate Trigger

In November last year, many FMCG companies, which were making chips and namkeens by “extruded” method were asked to pay 18% GST, instead of 12% and received tax notices to pay the pending amount by March 31, 2024. Extrusion is a food processing technique used to create “puffed” or “expanded” snacks that are ready to eat. Extruded snacks are mainly produced from cereal flour or starches. Being high in calories and fat with low protein, they are considered unhealthy.

In August 2023, the Centre clarified that any snacks that have been prepared by extrusion process should attract 18% tax and the Directorate General of GST Intelligence (DGGI) notices were based on this clarification.

However, the FMCG industry said there are items such as namkeen, fruit-based alcoholic and non-alcoholic drinks, flavoured milk and other processed food items where there is overlapping classification and which often attract different advance ruling in different states .

“Traditionally bhujia is taxed at 12% GST but now most of the manufacturers are using extrusion method to reduce fat content. This creates a grey area and many traditional bhujia makers now facing additional tax demand,” said a namkeen manufacturer, who did not wish to be identified. In the absence of a definition, the industry asked for clarity from the government, especially after many firms received DGGI notices.

Ahead of the approaching deadline, the FMCG industry made a detailed representation to the finance ministry and sought a resolution so as to avoid unnecessary litigation and notices.

Source: The Economic Times 

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