Taxability of commodities: Interesting journey under GST

Introduction

As we know some commodities are made available to us in packaged or branded form and some in loose forms, So, I decided to write an article which defines taxability of these items, since 2017 when Goods and Services Tax was implemented in India, the tax treatment of everyday consumables inter alia like cereals, pulses, flour, and dairy products have gone through a complete change in structure with respect of indirect taxation.

The main controversy in this respect has consistently revolved around whether such goods attract GST or are exempt from GST. Initially, this was determined by the brand ownership, and marketing perspective, but after the year 2022, the impact of taxability has decisively shifted toward whether the goods are pre-packaged and labelling in alignment with the Legal Metrology Act, 2009.

Hence in this article I tried to explain this shift i.e. from a exemption regime based on brands to a packaging test that is driven by compliance and have analysed the legal implication, interpretative issues, and implications for trade and industry, including the latest amendment via Notification No. 01/2025-Central Tax (Rate) dated 16th January 2025.

Before we proceed further, let’s understand what is Legal Metrology Act, 2009?

Specifically talking in respect to GST, the Legal Metrology Act, 2009 plays an important role in determining the taxability of goods specifically based on it’s packaging and labelling. That means the goods classified as “pre-packaged and labelled” under the Legal Metrology Act attract GST, even if it is unbranded. Thus, compliance with Legal Metrology provisions may directly trigger GST liability, especially under Section 2(1)(c) of the Legal Metrology Act read with GST notifications.

Section 2(1)(c) of the Legal Metrology Act defines the term “pre-packaged commodity” as:

“pre-packaged commodity means a commodity which, without the purchaser being present, is placed in a package of any nature, whether sealed or not, so that the product contained therein has a pre-determined quantity.”

Under GST, tax is applicable on “pre-packaged and labelled” goods as per the meaning derived from this section. Therefore, if goods meet the definition under Section 2(1)(c) and are also labelled as per Legal Metrology Rules, as I stated earlier, GST becomes applicable.

Initial framework to bring branded commodities under the preview of GST

At the start of GST on 1st July 2017, as per the Notification No. 2/2017–Central Tax (Rate) which deals with exemption under GST had provided the same to several essential goods including commodities, but now interpretation is made that exemption is only applied if these goods were unbranded. Through Notification No. 1/2017 GST council imposed 5% GST on similar goods if branded.

They have defined ‘Branded’ as

“An item qualified as branded if it was sold in a unit container, and it bore a registered brand name, or a brand name with an enforceable legal right”

As this definition, was seemingly straightforward, it easily gave rise to easy tax evasion strategies to people who dealt with these commodities.

The main loophole was brand disclaimer affidavits

This means that many sellers started disowning or denying their brand names through affidavits, claiming that their products are unbranded only to avoid GST, even though they continued using those brand names in advertising as well as in packaging. This strategy which they followed was legally weak, but during the normal GST assessments, it was difficult for authorities to prove misuse, which led to many court cases and loss of government tax revenue.

Now what happened in 2022?

To stop the misuse of law with the help of brand disclaimers, it was recommended in the 47th GST Council Meeting to make this shift from this notification relating to taxation of above goods being “brand-centric” to “packaging-centric”.

Accordingly, by the Notification No. 6/2022-Central Tax (Rate), effective 18th July 2022, the council had altered GST applicability to packaging-centric.

What is done in the case of pre-packaged and labelled goods?

Thus, this rule matched the Legal Metrology (Packaged Commodities) Rules, 2011, which required certain details to be printed on retail packages. Hence, any product that is sold in a retail packaging that needed these declarations had automatically came under the preview of GST, whether it had a brand name or not, this made tax evasion with help of affidavits useless.

Clarifications by CBIC via FAQs dated 17th July 2022

The main clarifications were provided by “Central Board of Indirect Taxes and Customs” to mitigate interpretational issues such as the GST applies only if the package is one that requires declarations under the Legal Metrology framework, secondly the loose sales or the unpackaged goods as well as the wholesale packages that exceeds 25 kg/litre were excluded, thirdly the retail pre-packaged and labelled goods, even if unbranded, were brought under the preview of GST.

This was an important step towards aligning GST with regulatory definitions and eliminating subjective exemptions.

Let’s analyse difference between branded and pre-packaged regimes pre and post 2022

Notification issued in 2025 which tightened the law

Effective from 16th January 2025, the GST Council via Notification No. 01/2025–Central Tax (Rate) substituted the existing Explanation (ii) related to “pre-packaged and labelled” goods.

The main legal and policy developments are threshold codification as I discussed above where, earlier, the 25 kg/25 litre exemption was dependent on Rule 3(a) of the Legal Metrology Rules, hence any amendment in that rule would automatically impact the applicability of GST. Hence, the new notification adds the above threshold into the GST act through above notification itself, delinking it from future possible changes in Legal Metrology act.

This move brought the certainty in compliance under GST as well as brought protection from indirect changes in GST rules.

Even it resulted in withdrawal of agricultural carve-out, that means, the earlier special exemption for agricultural farm produce (when packaged above 25 kg/litre) has been omitted. Now, all goods, whether agricultural or otherwise, will be uniformly treated under GST if they are intended for retail sale, and The package is ≤ 25 kg/litre and bears declarations under legal metrology act, This change ends the preferential treatment for agriculture under packaging-based GST applicability.

What might be the practical implications of this change?

Firstly, Small farmers and cooperatives who earlier benefited from exemption through quantity thresholds must now reassess packaging sizes and target markets to avoid unintended tax exposure.

Secondly, the compliance burden has been increased for MSME’s exposing them with the mandatory legal metrology declarations, they had to register in GST even for low-volume trades, also this catered a need to issue tax invoices and manage ITC compliances.

Thirdly, it worked on supply chain realignment that means the traders must revisit packaging contracts and reclassify SKUs, warehouse and logistics teams are required to segregate GST-applicable and exempt stock and E-commerce vendors must revise product listings to reflect tax impact.

Conclusion

The transition from brand-based GST levy to packaging-based compliance marks a deliberate and matured evolution in indirect tax policy. By moving towards objective, enforceable standards coupled with in allied legislation like the Legal Metrology Act, the GST regime has now closed interpretational gaps and tax avoidance loopholes.

The amendment made this year (2025) further reinforces this approach by introducing statutory certainty through fixed thresholds, uniform treatment across sectors and administrative ease by synchronizing tax law with compliance law.

However, it also necessitates proactive adaptation by businesses especially those operating at the last mile of the supply chain.

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Author can be contacted at aman.rajput@mail.ca.in