A plan to impose Goods and Services Tax (GST) on pan masala and gutkha on the basis of installed production capacity may be dropped due to difficulties in operating the input tax credit (ITC) system, sources told FE.
In May 2021, the GST Council formed a Group of Ministers (GoM) headed by Odisha Finance Minister Niranjan Pujari to examine the feasibility of imposing GST on products like pan spices and gutkha based on installed capacity, instead of actual production. This was in light of the large-scale tax evasion detected by the unit under-reporting the output.
The GOM has not yet submitted its report to the council.
Currently, various types of tobacco items and pan spices attract maximum 28% GST rate and ‘Compensation Cess’. The cess rate on tobacco products is 290%, while on pan spices it is 135%.
Under the old excise regime, taxes were levied on the actual production and sale of a number of such products based on the maximum equipment capacity installed. Following the introduction of GST in 2017, some states have demanded a return to the power-based tax system for tax evasion-prone sectors.
Under the excise regime, there were also many problems because tax officers had to regularly survey how many machines were being used and from time to time there were frequent disputes with industry players over how many machines were being used.
“Finally, we see that manufacturers are increasing the speed of machines because of technology. We had to catch it every year, “said one official. While the big players gain in this process, the small players leave the business because they cannot invest in new technologies and machines.
Since GST operates on the basis of a price chain, the power-based tax system will also make it difficult for ITCs to operate because wholesalers and retailers do not operate in a power-based system.
“The power-based tax is a clumsy and clumsy scheme, it will lead to abuse and may not lead to higher revenue,” said another official.