With an aim to curb GST evasion by pan masala and gutkha companies, the Government is likely to stringent scrutiny and audits. However, a plan to levy Goods and Services Tax (GST) on them on the basis of installed manufacturing capacity may be dropped.
In May 2021, the GST Council set up a group of ministers (GoM), headed by Odisha finance minister Niranjan Pujari, to examine the feasibility of levying GST on products such as pan masala and gutkha, based on the installed capacity of the units, rather than their actual production.
The move is in light of a decline in revenues from these industries reported by many states after the introduction of GST in July 2017. Tax authorities have found large-scale tax evasion by the units via under-reporting of output.
Reportedly, the GoM has finalised its report, a member of the GoM said, but refused to disclose the recommendations. The report will likely be taken up in the next GST Council meeting. Currently, assorted tobacco items and pan masala attract the highest GST rate of 28% and also the ‘compensation cess’. The rate of cess on tobacco products is 290%, while that on pan masala is 135%.
The Centre has been contesting the states’ view that tax revenues from these industries have declined vis-à-vis the previous excise-VAT regime even though it also felt tax evasion was an issue with this industry under both regimes.
In the old excise regime, such products were taxed based on the maximum machinery capacity installed, rather than the actual production and sales. Under the GST regime, the actual transaction (sales) value is the tax base. After GST was rolled out in 2017, some states demanded reverting to capacity-based taxation for the tax-evasion-prone sector.
Under the excise regime, there were also plenty of problems as the tax officers had to survey regularly how many machines were being used, and there would often be disputes with the industry players on the number of machines being used at a point in time tax officers found that manufacturers were increasing the speed of machines because of technology to under-report output and evade taxes. While bigger players gained in the process, smaller players got out of business as they could not invest in new technology and machines.
Since GST works on a value chain basis, capacity-based taxation will also make it difficult to administer input tax credit as wholesalers and retailers don’t operate in a capacity-based mechanism.
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