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The food processing industry can breathe easy as packaged food items may be exempted from the proposed Goods and Services Tax (GST). At present, processed food products are exempted from central excise, but most states levy Value Added Tax (VAT) on these.

Certain packaged food items might be put in the exempted category, said a finance ministry official. He said the government might have to exempt these goods from duty in GST, on fears that levying it even at the lower rate of 12 per cent (6 per cent each for the Centre and the states) could fuel inflation.

Processed fruit and vegetables, ready-to-eat food, frozen food, bakery products, baby food, curd, butter milk, tea, ketchup, beverage and noodles, among others, come under the packaged food category.

On some of these items, many states are already levying tax at a rate lower than the one approved by the Empowered Committee (EC) of state finance ministers. For instance, Tamil Nadu taxes bakery products at 4 per cent, instead of the 12.5 per cent approved by EC. Maharashtra also levies 4 per cent tax each on semi-processed fruit/meat and dry fruits, whereas the EC-approved rate is 12.5 per cent. Most states levy 4 per cent VAT on tea, instead of the approved 12.5 per cent rate.

Analysts, however, think taxing processed food in GST at a lower rate would not have much impact on prices. The Centre is looking at a single rate of 16 per cent in three years from the date of introduction of GST. The goods like cold drinks, which are taxed at 12.5 per cent, by the states may not be impacted much, but fruit juices, tea, edible oil, which are taxed at 4 per cent, will be hit if taxed in GST.

“I think from a long-term perspective we should have two rates — a merit rate and a concessional rate, which is lower than 12 per cent. Products which are not subject to central excise but attract VAT may come under the lower rate in GST,” said Pratik Jain, executive director, KPMG.

Sujit Ghosh, partner, BMR Legal, said processed food items could be taxed at the concessional rate of 12 per cent in GST, and that might not lead to price rise because today manufacturers cannot claim credit on everything. In GST, they would get input tax credit and the costs would be lower, he said.

Manufactured food products constitute about 12 per cent of the Wholesale Price Index (WPI) basket. The Rs5,45,000-crore food processing industry comprises about eight per cent of the country’s gross domestic product. It is estimated to reach a level of Rs8,73,000 crore by 2014-15.

At present, 350 items are exempted by the Centre, whereas states have excluded 99 items. A joint group of the Centre and states will work out a list of items to be exempted. The Centre may prefer to keep some other goods exempted from excise duty under the zero-tax category in GST.

Another official said levy of tax on agricultural produce like rice and wheat could also spur price rise and thus these might also be exempted from GST. Moreover, these taxes are paid by the Union government for procuring food grains for the central pool, and a rise in the rates would mean increased food subsidy.

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