VAT reform set to disappoint Indian food processors

15-Mar-2012 - Last updated on 16-Mar-2012 at 09:00 GMT

India’s food and beverage processing industry is hoping for some tax respite from the fiscal budget for 2012-13, but indications are that is unlikely to occur.

Industry groups like the Federation of Indian Chambers of Commerce and Industry (FICCI) have asked for the 10% central value-added tax (VAT) to be reduced to 0% for many food items.

A similar demand was made in November last year by the All India Food Processors' Association (AIFPA), which complained of logistical issues caused by VAT differences between states and called for a uniform rate across borders.

Nadia Chauhan, joint managing director at Mumbai-based Parle Agro also rued the fact that although primary agricultural commodities enjoy tax exemptions, processed foods are subject to multiple levies.

“The goods and services tax [GST] does provide a hope to rationalise and simplify the tax structure,” she said, referring to the same tax under another name.

The GST is a value added tax to be implemented by April 2012. It will replace all indirect taxes levied on goods and services by the Indian Central and State governments. It is aimed at being comprehensive for most goods and services with few tax exemptions.

GST may not be the answer

However, if the pre-Budget Economic Survey report of the Economic Advisory Council to the Prime Minister were anything to go by, the GST would not be the savior food processors have been hoping for.

The report, which was released earlier in the week, acts as a fair indicator of which way the finance minister will veer in his speech.

While the GST will rationalise rates across borders, the report clearly said, “there is no need to tax processed food items like breakfast cereals at a lower rate.”

Food processors had clearly stated their demands that the tax rates on food items had to be brought down and this recommendation, if put enforce by the finance minister, is bound to anatgonise them.

“We cannot have even an additional 1% tax. Processed food should be excluded from the purview of taxes as it will lead to an increase in inflation by 10-15%,” Piruz Khambatta, CMD of Rasna and the AIFPA head, said earlier.

India is a federal republic, and so the central and state governments will implement respectively the Central GST and the State GST concurrently. Both tax rates will be uniform across the country.