GST applicability on ‘Pre-packaged and labelled commodity’

1. GST APPLICABILITY ON ‘PRE-PACKAGED AND LABELLED COMMODITY’ AUTHOR :KESHAV MALOO AND ASSOCIATES https://taxguru.in/goods-and-service-tax/gst-applicability-pre-packaged-labelled-commodity.html On the recommendations of 47th GST Council meeting, Government has levied GST on Pre-packaged and labelled commodity on various specified food items covering under Chapter Heading 1 to 21 of Customs Tariff by amending CGST Rate Notification No. 01/2017 (‘Rate Notification’) by Amendment CGST (Rate) Notification No. 06/2022 and and 02/2017 (‘Exemption Notification’) dated 28.06.2017 by 07/2022 dated 13.07.2022 which has been made applicable from 18.07.2022. This will have major impact on how GST is levied in the food industry by changing the basic criteria of taxability and aligning it with Legal Metrology Law. Let’s look in finer detail the impact on the trade and industry. A. Erstwhile taxation scheme on food items (up to 17.07.2022) Till 17th July, 2022, specified food items (normally used by an end consumer) which were unbranded or on which actionable claim or enforceable right in respect of such brand name has been voluntarily foregone were exempted from GST. Whereas, such food items which were put up in a unit container bearing a registered brand name or on which right to actionable claim or enforceable right in respect of such brand name was available was subject to GST majorly @5% and few @12% for e.g. India Gate rice, Aashirwad atta etc. B. New Scheme of taxation w.e.f. 18.07.2022 Now, the criteria of taxability based on registered brand name/right to brand has been done away with and now GST will apply on supply of ‘pre-packaged and labelled commodity’ (on specified food items listed in Annexure-A of this Note). Further, GST has been introduced on pre-packaged and labelled curd, butter milk, lassi which was earlier exempted even if branded. Further, CBIC has issued FAQ dated 17.07.2022 clarifying various aspects on taxability. C. Scope of ‘Pre-packaged and labelled commodity’ The “pre-packaged and labelled commodity” has been defined in the Rate and Exemption Notifications to mean a “pre-packaged commodity” as defined in clause (l) of section 2 of the Legal Metrology Act, 2009 (1 of 2010) where the package in which the commodity is pre-packed or a label securely attached to it is required to bear the declarations under the provisions of the Legal Metrology Act, 2009 (1 of 2010) and the rules made under it. The reference needs to be made to The Legal Metrology Act, 2009 (‘LMA’) and Legal Metrology (Packaged Commodities) Rules, 2011 (“LMR”)

2. Section 2(l) of The Legal Metrology Act, 2009 (‘LMA’) defines the term pre-packaged commodity as follows: “Pre–packaged commodity” means a commodity which without the purchaser being present is placed in a package of whatever nature, whether sealed or not, so that the product contained therein has a pre–determined quantity. On a conjoint reading of the above definitions contained in GST law and LMA, a commodity will be treated as pre-packaged and labelled for the purposes of GST if it satisfies the following conditions: i. Commodity is placed in a package of whatever nature with a pre-determined quantity ii. Packaging need not be mandatorily sealed iii. Such packaging of commodity is done without purchaser being present iv. Such package is required to bear the declarations as required under the provisions of the LMA or LMR Firstly, the product should be pre-packaged i.e. package in loose form or temporary packing without any pre- determined quantity mentioned on the package will not be treated as pre-packaged commodity and hence, will be out or purview of GST. If a pre-packaged commodity as defined in LMA is required to mention declarations as per LMA or LMR, then it will fall under the scope of ‘pre-packaged and labelled commodity’ for GST purposes and GST will apply on specified food items at applicable rate. D. Declarations on packages under LMA and LMR According to Section 18 of the LMA, any pre-packaged commodity that is sold, manufactured, distributed, delivered etc. must be in the prescribed standard quantities and have the prescribed declarations and particulars on the package. Rule 6 of Chapter II of Legal Metrology (Packaged Commodities) Rules, 2011 (“LMR”) prescribe the declarations required to be mentioned on various packages intended for retail sale alongwith certain exclusions. Rule 2(k) of LMR defines ‘retail package’ as means a package which are intended for retail sale to the ultimate consumer for the purpose of consumption of the commodity contained therein and includes the imported packages. Chapter-III- Rule 24 provides for declarations to be made on every whole-sale package. Rule 2 (r) of LMR defines ‘wholesale package’ a package containing- (i) a number of retail packages, where such first mentioned package is intended for sale, distribution or delivery to an intermediary and is not intended for sale direct to a single consumer; or (ii) A commodity sold to an intermediary in bulk to enable such intermediary to sell, distribute or deliver such commodity to the consumer in smaller quantities; or, (iii) Packages containing ten or more than ten retail packages provided that the retail packages are labeled as required under the rules.

3. Accordingly, wholesale package is meant for sale to intermediary and either may have multiple retail packages inside it or single package which may be sold by retailer in smaller quantities. D.3 Non-applicability of declarations and hence, not subject to GST As per Rule 3 of LMR, requirements of declaration are not applicable on following packages: i. packages of commodities containing quantity of more than 25 kilogram or 25 litre; ii. Cement, fertilizer and agricultural farm produce sold in bags above 50 kilogram; and iii. Packaged commodities meant for industrial consumers or institutional consumers. Rule 26 provides for exemption in respect of following packages: if the net weight or measure of the commodity is 10g or 10 ml or less, if sold by weight or measure (Not applicable to tobacco and tobacco products) Package containing fast food items packed by restaurant or hotel If a pre-packaged commodity falls under above exclusions, it shall not be treated as ‘pre- packaged and labelled commodity’ for GST purposes and hence, out of purview of GST. E. Analysis and Impact E.1 Impact on sale to Institutional and industrial buyers If sale is made by a manufacturer or wholesaler to Institutional (e.g. Hotels, railways, Airlines, Hospitals ) and industrial buyers (for e.g. factory buying flour for use in canteen) for their own consumption and for not further trading purposes, it is not a prepackaged and labelled commodity for GST, even if packed in small retail quantities, and exempted from GST. However, as per LMA/LMR, such packages should contain declaration ‘Not for Retail Sale’. So if, retail packs are purchased by Institutional and industrial buyers not bearing such declaration then, GST will be applicable. E.2 Impact on agricultural farm produce The agricultural farm produce sold in bags above 50 Kg is not required to mention declarations and hence, exempted from GST. The term agricultural farm produce is not defined in LMA and definition contained in GST law cannot be borrowed here as term under consideration is mentioned in LMR, hence, general meaning is required to be given. It is a matter of interpretation to understand the scope of ‘agriculture farm produce’ which in common parlance is understood to embrace produce which are cultivated directly from farms with essential activity at Farm like segregating, grading etc. without being required to be processed at Factory/Mills. If such produce is required to be processed at Factory/Mills, in our opinion, it shall be outside the scope of ‘agriculture produce’ and general limit of packages of upto 25 Kg will apply i.e. taxable to GST if packages upto 25 Kg. E.3 Impact on Retail packages other than agriculture produce Specified Retail pre-packed commodity upto 25 Kg/25 Ltr. is subject to GST. Such tax is applicable at each point of supply chain from manufacturer to wholesaler to retailer. E.4 Impact on Wholesale packages

4. As per the Press Release issued on recommendations of 47th GST Council meeting, it was mentioned that GST is being applied only on pre-packaged and labelled retail packs. However, the current amendments and definition suggest that no exclusion has been given to wholesale packages and hence, even wholesale packages upto 25 Kg or 25 Ltr. are taxable. Further, FAQ issued by CBIC dated 17.07.2022 also clarifies that a wholesale package containing say 10 retail packs of flour of 10 Kg each are also taxable thereby levying GST on wholesale packages also. This appears logical to ensure seamless input tax credit chain at each point. However, if a wholesale package of 50 Kg which does not contain any retail packages inside it are sold to retailer who in turn sells the commodity in smaller quantities in loose form, whether GST will apply?. FAQ No. 4 dated 17.07.2022 cover this situation wherein it has been clarified that even if rule 24 of Legal Metrology (Packaged Commodities) Rules, 2011, mandates certain declarations to be made on such wholesale package, then also, it would not be considered as pre-packaged and labelled commodity. Even though, FAQ has disregarded the declaration requirements under LMA/LMR on wholesale package to determine taxability, however, no such distinction is given in definition of ‘pre-package and labelled commodity’ thereby leaving room for dispute and litigation. This warrants a suitable amendment in the Notification if the intention is to tax only packages intended for retail sale (sold as retail packages or as a part of a wholesale package containing such retail packages) to avoid multiple interpretations and litigation. F. Scenarios with Examples F.1 Taxable under GST Sr. Scenario Remarks Retail Pre-Packaged commodity upto 25 Kg/25 Ltr. (50 Kg in case of agriculture produce) Wholesale package containing multiple Retail packs upto 25 Kg/25 Ltr. Wholesale package of bulk quantity upto 25 Kg/25 Ltr. 50 Kg in case of agriculture produce) without any retail packages in it for resale in smaller numbers by Retailer in pre-packaged form Wholesale package of bulk quantity upto 25 Kg/25 Ltr. 50 Kg in case of agriculture produce) without any retail packages in it for resale in smaller numbers by Retailer in loose form Wholesale package containing individual package more than 25 Kg/25 Ltr. (50 Kg in case of agriculture produce ) and sold in pre-packaged form by Retailer Supply of Pre-packaged packs to Institutional or industrial consumer Even if the Retailer does not mention declarations but required under LMA/LMR, then also taxable 1 2 Clarified by FAQ No. 4 dated 17.07.2022-Taxable Taxable at Wholesaler as well Retailer level. Clarified by FAQ No. 6 dated 17.07.2022 3 Taxable at Wholesaler level only. Exempted for Retailer. 4 Exempted at Wholesaler level but taxable at retailer level 5 Exempt. But taxable, if not marked as ‘Not for retail sale’ 6 F.2 Exempt under GST

5. Sr. Scenario Remarks Exempted. Marking Not for Retail Sale mandatory. Supply to Institutional or Industrial customer whether by Manufacturer or Wholesaler 1 Suitable Affidavit/Declaration may be obtained from Buyer for intended use Retail Pre-Packaged commodity more than 25 Kg/25 Ltr. (50 Kg in case of agriculture produce) Retail Pre-Packaged commodity less than 10 gm or 10 ml Package sold in loose or temporary form or packed in presence of consumer Exempt. Since, no declaration is required as per LMR Exempted, Since, no declaration is required as per LMR 2 3 4 Not taxable Exempt. Even though declaration required under Rule 24 as it is not intended for retail sale as clarified by FAQ No. 4. This is not in line with language of the definition of ‘pre-packaged and labelled commodity’ under GST as once declaration is required, it is taxable Hypothetical scenario. Wholesale package containing individual package of more than 25 Kg/25 Ltr. (50 Kg in case of agriculture produce ) and sold in loose form by retailer 5 6 Branded pack but not pre-packaged and labelled G. Key Points 1. Time of Supply aspects a. If Supply is made upto 17.07.2022 i. Old taxation Scheme unless Invoice issued and payment received on or after 18.07.2022 b. If supply is made on or after 18.07.2022 i. New taxation scheme applicable unless Invoice/Bill of supply issued and payment received upto 17.07.2022 2. Internal control system to apply GST or exemption based on various scenarios followed by proper record keeping and stock records 3. If your product was earlier exempted but now taxable w.e.f. 18th July 2022, to apply for GST registration within 30 days 4. To claim ITC on stock (Raw material, finished goods, semi-finished goods) lying on 18th July 2022 and capital goods, if registration applied within 30 days 5. E-way bills to be generated above prescribed limit 6. To assess the impact of any Anti–Profiteering angle on account of increase in price with simultaneous benefit of ITC on purchases 7. Even if GST is exempted for Wholesaler, independent analysis of taxability at retailer level is required in certain situations

6. Annexure-A GST Rate Chart HSN Description Rate 0202, 0203, 0204, 0205, 0206, 0207, 0208, 0209, 0210 0303, 0304, 0305, 0306, 0307, 0308, 0309 0403 0406 0409 Meat and edible meat offal 5% Fish and crustaceans, molluscs and other aquatic invertebrates 5% Curd; Lassi; Butter milk Chena or paneer Natural honey All goods [other than fresh or chille Guts, Bladders And Stomachs Of Animals(Other Than Fish), Whole And Pieces Thereof, Fresh, Chilled, Frozen, Salted, In Brine, Dried Or Smoked Dried leguminous vegetables, shelled, whether or not skinned or split Manioc, arrowroot, salep, Jerusalem artichokes, sweet potatoes and similar roots and tubers with high starch or inulin content, frozen, whether or not sliced or in the form of Pellets Dried makhana, whether or not shelled or peeled All goods i.e. cereals Wheat and meslin, Rye, Barley, Oats, Maize Corn, Rice, Grain sorghum, Buckwheat, millet and canary seed; 5% 5% 5% 0504 5% 0713 5% 0714 5% 08 10 5% 1001, 06,1007,1008 1002,1003,1004,1005,10 5% [other cereals such as Jawar, Bajra, Ragi] 1101 Wheat or meslin flour Cereal flours other than of wheat or meslin i.e. maize (corn) flour, Rye flour, etc. Cereal groats, meal and pellets, including suji and dalia Meal, powder, Flour flakes, granules and pellets of potatoes Meal and powder of the dried leguminous vegetables of heading 0713 (pulses) [other than guar meal 1106 10 10 and guar gum refined split [0713 ]], of sago or of roots or tubers of heading 0714 or of the products of Chapter 8 (i)Jaggery of all types including Cane Jaggery (gur), Palmyra Jaggery (ii)Khandsari Sugar Puffed rice, commonly known as Muri, flattened or beaten rice, commonly known as Chira, parched rice, commonly known as khoi, parched paddy or rice coated with sugar or gur, commonly known as Murki Tender coconut water Namkeens, bhujia, mixture, chabena and similar edible preparations in ready for consumption form, other than those pre-packaged and labelled 5% 1102 5% 1103 1105 5% 5% 1106 5% 1701 or 1702 5% 1904 5% 2009 89 90 12% 2106 90 12%