After Popcorn, FM Nirmala May Announce New Tax
The Goods and Services Tax Council, led by Finance Minister Nirmala Sitharaman, recently hogged the headlines as it decided to levy a varying GST rate on the type of popcorn. Such an action has started talks among the food industry as well as consumers about its greater implications of flavor-based tax slabs.
The New GST Rates for Popcorn
The GST Council has introduced three different slabs of taxation for the purpose of popcorn:
1. 5% GST for salted and spiced popcorn.
2. 12% GST for packaged and branded popcorn.
3. 18% GST for caramel popcorn as a sugar confectionery item.
Such change of measure portends a significant shift of paradigm of taxing food articles. According to the council’s rationalized stance, the nature of product, value addition that takes place, and tax categorization already in practice contribute towards such a differentiation of products.
Nonbranded and lightly seasoned are rated to be a rudimentary product, while popcorn that bears a brand label along with caramel is grouped within products that deserve taxed more based on processing value added as well as on their marketing
1. Pricing and Consumer Behavior
The new tax slabs will probably make popcorn products pricier. The smaller manufacturers of unbranded popcorn may gain from lower 5% GSTs, making them cheaper to the consumer. For companies selling branded or caramel popcorn, higher tax rates can lead to a hike in prices. Consumers may begin to prefer the cheaper snacks or opt for other options altogether.
2. Opportunities and Threats for SMEs
SMEs operating in the popcorn business might not have much competition with big brands who could absorb high tax costs. Non-branded producers of popcorn could also find more opportunities for expansion due to their low tax burden.
3. Innovation and Diversification
The introduction of various slabs of tax will encourage innovative ways of product development that cater to the lower-slabs of taxes. A company may focus on making noncaramel flavored popcorns fall in the 12 percent slab of GST, claiming a premium quality without encroaching upon the higher-tax slab.
Possible Introduction in Biscuits and Cookies
The reports state that the GST Council is also considering a similar model for biscuits and cookies. The move may bring different rates of GST for different flavors such as:
1. Plain or lightly sweetened biscuits
2. Cream-filled biscuits
3. Chocolate-covered biscuits
4. Jelly-filled biscuits
Even though the decision is still under review, it is likely to be declared post finalization of popcorn GST changes. This could, therefore, create a precedence in taxation for other food products by the ingredients used and levels of processing involved.
Implications for Other Food Products
Introduction of flavor-based tax slabs for biscuits could open the floodgates for other food items in the following categories
1. Flavored snacks such as spiced chips and cheese puffs
2. Confectionaries (hard candies, gummy treats)
3. Packaged food products (readymade meals, breakfast cereals)
This may increase the complexity of taxation but aligns tax rates with perceived luxury or value addition for each product.
Public and Industry Reactions
The new GST slabs on popcorn and the speculated changes for biscuits have raised mixed reactions.
1. Public View
Many consumers feel that essential snacks and food items should remain affordable, expressing concerns over the rising costs of everyday indulgences. While some appreciate the rationale behind taxing premium and luxury food items more heavily, others worry about the cascading effect on household budgets.
2. Industry Response
The food industry has reacted differently. Large manufacturers are concerned about the administrative burden of following multiple tax slabs and the loss of demand for higher-taxed products. Smaller businesses see an opportunity to compete in the lower-tax segments.
Benefits and Challenges of Flavor-Based Taxation
Benefits
1. Fair Taxation: The tax rates are differentiated based on product types, ensuring that luxury items are taxed more than basic necessities.
2. Promoting Small and Local Businesses: Low tax on non-branded or simpler goods can promote small and local businesses.
3. Government Revenue Collection: High tax on luxurious items can result in improved revenue collection by the government.
Problems
1. Complexity of Administration: Introducing multiple tax rates for the same category can complicate the compliance issue for businesses and the problem of enforcement for tax administrators.
2. Risk of Misclassification: Determination of the correct tax slab for borderline products would be susceptible to litigation.
3. Effect on Consumer Expenditure: Increased taxes on popular snacks would reduce sales, and the demand will be affected in the overall sense.
This balance is crucial: the GST Council, while figuring out ways to classify food products for tax purposes, is definitely concerned with making it more revenue-generating and at the same time affordable.
The introduction of popcorn tax slabs and a probable change in biscuit tax indicates that this is only the beginning of a move towards more subtle implementation of GST. Clarity and fairness could emerge from it, but again, that would question its impact on the overall food industry and consumers.
The businesses will strategize and change their processes, especially on product development and pricing. For the consumers, however, they must be adequately informed about the developments on how their choices are actually affected.
In the coming months, once the GST Council gets the final word out on their decisions, the reaction and adjustments in the market will have insights into how effective and workable flavor-based taxation could be.
Whether it reaches other categories is anyone’s guess, but one thing is for sure, though-it sets the stage for a more detailed, equitable GST framework.
