India Sets 5% GST for Tea

Tea will be taxed at 5 percent as India finalized rates for its inaugural goods and services tax (GST) effective July 1.

Rates were set last week for more than 500 services and 1,200 categories of goods following 10 years of negotiations. The intent is to streamline the existing tax structure and capture more tax dollars by reducing tax evasive cash payments along the supply chain.

Products fall into one of five categories with effective tax rates of zero for food grains, fresh vegetables, milk, newspapers, and hearing ads. Tea is included in the category of mass consumption items such as coffee, sugar, infant formula, medicines, coal, and renewal energy devices. The standard rate is 12 percent. Items like butter, fruit juice, candles, leather goods, bicycles, utensils and most household goods are grouped at the low end with items such as ice cream, petroleum jelly and toothpaste at the 18 percent upper end of the standard rate (toothpaste is currently taxes at 25 percent). Vehicles, air conditioners, make up, hair dye, refrigerators, computers, fax machines will be taxed at 28 percent, the top end of the scale. A luxury tax will be added to soda and some products, such as chewing tobacco, a punitive tax of 160 percent will apply. India joins 160 countries that levy a nationwide tax on purchased goods.

Tea industry challenges

Instant coffee will be charged a higher rate than green and roasted coffee but it is not clear whether instant tea (and tea concentrates) will be subject to the 5 percent rate or pay 12 percent.  Flavored teas will be taxed at 5 percent. India is still sorting out the fine points of applying the levy.

About half of the tea sold in India is purchased at auction where buyers pay a 1 percent value added tax (VAT). Tea sold privately is levied a 5 percent VAT. The 5 percent GST on tea will take away the tax advantage of selling teas at auctions, according to a report in the Economic Times.

“While the rate of VAT had hovered around 5 to 5.5 percent on made tea across the country with Punjab having the highest 6.05 percent, putting tea in the 5 percent bracket in the GST will immensely benefit both tea manufacturers as well as consumers,” Bidyananda Barkakoty, a spokesman for the North-East Tea Association (NETA) told the Indian Express.

Tea is classified as a plantation industry and green leaves will be exempt from the new taxes, which is a “great relief” to the 200,000 small tea growers in Assam, said Barkakoty.

The result of the national GST is likely an overall reduction in taxes, along with simplification of the tax burden since the present system permits states to calculate taxes on taxes already charged. Tea growers for example, often must pay 1 percent taxes when transporting goods across state lines. In several instances traveling to a nearby auction (if it is situated in an adjoining state) causes confusion unless the state specifies exemptions. In the worst situations, the increase in value of the manufactured tea is then taxed on its return to the state where it was harvested.

Growers successfully resisted a levy of 12 percent on tea, arguing the higher rate would cost consumers 6–8 percent. India is one of the world’s largest tea exporters but most of its tea is consumed in the domestic market. The joint forum of representatives of the Assam Tea Planters’ Association (ATPA), the North Eastern Tea Association (NETA), the Bharatiya Cha Parishad (BCP), and the Tea Board of India (TBI) all welcomed the simplification of rates.

Collectively, association representatives last year asked the central government to keep the tax below 5 percent.

Applying a single tax at the point of sale will allow producers to more easily claim credits and minimize opportunities for corruption, according to a report by Bloomberg News.

Sources: Hindustan Times, Bloomberg News, Indian Express