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GST aftermath: Government mulls pruning tax exemption list

August 08, 2016 11:08 IST

TaxWhen the GST is enforced, exemptions from central excise on tea, coffee, food might go, reports Dilasha Seth

About 200 items, including premium tea and coffee, ready-to-eat food and branded biscuits, could lose tax exemptions when the goods and services tax comes into effect.

The Union government is planning to prune the list of excise duty exemptions from the current 300 to the states’ list of 90 items that are exempted from value added tax.

After the Rajya Sabha passed the Goods and Services Tax (GST) Constitution (Amendment) Bill last week, the Centre and the states are working to make a uniform list of items that would exempt from the unified indirect tax.

“The idea is to keep exemptions at a minimum. We have prepared a draft exemption list.

"The list will be pruned to 90 items to match the state level,” said an official.

The Constitution (amendment) Bill will be introduced in the Lok Sabha on Monday.

The lower House of Parliament has to pass it again -- it had passed the Bill initially in 2014 -- as the Centre has introduced some changes to bring the states and the Opposition parties on board.

Only after half of the states ratify it and President Pranab Mukherjee gives his assent, the GST council would be set up to take a call on the exemption list.

It would come up in the subsequent GST Bills, expected to be passed by Parliament and state Assemblies in the winter sessions.

States exempt unprocessed items and those consumed by the poor, such as fruit, fresh vegetables, salt, grains like wheat and rice, besides coarse fabric such as khadi from VAT.

The Centre, on the other hand, provides excise exemption for processed foods such as biscuits, butter and cheese besides pharmaceuticals and a concessional rate of 2 per cent on the gross and 6 per cent on net to fruit-based items.

The list of exempted goods from central excise duty has shrunk from 400 items in 2011-12 to 300 now.

At present, common exempted items between the Centre and states include bread (excluding pizza bread), eggs, milk, fresh vegetables, betel leaves, cereals, books, salt, and the national flag.

Chief economic adviser Arvind Subramanian in an interview to Business Standard said the poor will largely be protected under the GST since 53-54 per cent of the consumer price index basket will be exempt from it, 30-35 per cent will be taxed at a lower rate and only 12-13 per cent will be taxed at the normal rate.

Although the list of exempted goods and services under the GST will be a common one, items of local importance in certain states could be exempted.

For instance, coconut oil in Kerala, sattu in Bihar and jute in West Bengal could get special exemptions.

The draft model GST law provides tax exemption provision for certain goods or services, taking public interest into account.

“If the central or a state government is satisfied that it is necessary in the public interest. . . it may, on the recommendation of the council, by notification, exempt generally either absolutely or subject to such conditions. . . goods and/or services of any specified description from the whole or any part of the tax leviable thereon,” the draft law states.

CEA Subramanian, in his report on the GST, argued that extensive central excise exemptions amounted to about Rs 1.8 lakh crore, or 80 per cent of the actual collections.

“Given the historic opportunity afforded by the GST, the aim should be to clean up the Indian tax system that has effectively become an ‘exemptions raj’ with serious consequences for revenue and governance,” the report said.

It called for the list of exemptions to be restricted to a few merit goods such as food that featured prominently in the consumption basket of the poor.

At the state level, tax experts argued that the move could interfere with the information technology system, the backbone of the proposed uniform tax regime.

“In an ideal GST regime we should not have differing rates across states. It will perpetuate some of the problems. But goods of local importance could be accommodated within the band which the states will operate -- say plus or minus 2 per cent,” said Saloni Roy of Deloitte.

Other agreed.

“India is a vast country.

Naturally, some states may want flexibility to exempt certain items of local importance.

However, it must be ensured that this list is kept to the minimum.

For goods such as rice and oil, which are excise exempt but liable to VAT, the government may want to consider a lower rate band of 6-7 per cent or exempt them all together,” said Pratik Jain, partner and leader, indirect tax, PwC The negative list of services, exempted from the levy, will be reduced to include only essential services such as health or education.

“In case of services, we will have only a very small number of essential services out of the GST net,” the official said.

The negative list of services has 18 heads which include health care, education, goods transport agency, non air-conditioned restaurants among others.


In its effort to minimise exemptions under the GST, the Union government may cut the exemption list


Premium tea, premium coffee, ready-to-eat food, branded biscuits


Bread (excluding pizza bread), eggs, milk, fresh vegetables, betel leaves, cereals, books, salt and the national flag


Health care, education, sports, goods transport agencies, non-AC hotels and restaurants, and services to by the United Nations or a specified international organisation

Dilasha Seth in New Delhi
Source: source