Processed food items like noodles, ketchup and pre-mixes are likely to become a bit costlier after the forthcoming Budget, with the finance ministry mulling to bring these products under the excise net. The move is in line with the policy to reduce the number of exemptions and pave the way for the comprehensive goods and services tax (GST) regime.
Mindful of the high food inflation and the need to avoid any measure that could boost it, the ministry would opt for the middle path and settle for an excise duty rate of 4% for these items. While the median excise duty which is applicable for most items is 10% at present, a group of merit items including drugs and some food items attract a lower rate of 4%. The plan is to bring more processed food items also under this lower rate.
Currently, the processed food industry enjoys tax concessions in the form of excise waiver for finished goods as well as certain inputs. There are cases where the finished product is exempt but the inputs are not, making it difficult for the industry to get tax refund under the Cenvat system.
?There shall be a reduction in the list of exemptions but bringing the duty rate from 0 to 10% (from nil to current peak rate) is a difficult thing. So, sensitive items like processed food could be brought under 4% excise,? a source said.
The move is a step to broaden the tax base for the GST regime. In the GST regime, the government shall do away with most of the exemptions as these could break the credit chain that is integral to the proposed multi-point tax on value addition. The idea of a merit rate of excise for a lesser number of products is also in conformity with the current plan for GST. When the GST kicks in, (which could take another year), there could be two tax rates for goods? one standard rate that would apply to most items and a lower rate for essential commodities. And there would be a separate rate for services.
Currently, around 350 goods are there in the government?s excise duty exemption list while 99 items are on the states? value-added tax exemption list. The list has to be pruned down before GST is rolled out in the country.
?For GST the government needs to prune down the list of exemptions so the move is in the right direction,? said Pratik Jain of KPMG.