Papad-Makers in a Pickle Over AAR Rulings Input Tax Credit

What is a papad? Of course, papad or papadam or vadam is India’s favorite indigenous cracker, and it is usually round and fried or roasted.

But what if it is square and flavored with cheese or sprinkled with jalapenos? Does it remain a papad anymore? An authoritative answer to this question could mean either no goods and services tax on the product or 18% GST.

In the absence of clarity on the issue, many small and medium enterprises (SMEs) and cottage industries, which dominate the segment, have approached the Central Board of Indirect Taxes and Customs following three contradictory rulings by the Authority for Advance Rulings (AAR).

“Classification issues, such as that in the case of papad recently, keep coming up in GST, and contrary rulings in different states make it very difficult for manufactures to plan their business and the related pricing aspects,” said MS Mani, partner, Deloitte India.

Once recent ruling said that “papad by whatever name it is known” remains a papad due to the raw materials used in it and its end-use. Another ruling said that the moment a papad changes size or shape, or adds new ingredients, it becomes “unfired fryums” and should attract 18% GST.

That’s a whopping difference for most manufactures, who operate on margins of just 4-5%.

“The business of papad and related products relies on agro inputs, which are not subject to GST. It is employment intensive and largely operated by SMEs, making it even more difficult for businesses to operate pronounced by the AAR,” said Mani.

Under the GST framework, there is a way to integrate the tax through tax credit. However, most of the ingredients used in making papad, such as dough and Indian spices, are categorized as agro products and are outside the ambit of GST. As a result, manufactures are not able to take input tax credit for the ingredients, said experts.

Input tax credit is a mechanism where by the tax on input can be set off against future tax liability.

According to culinary experts, owing to India’s vast size, often the same food item is called by different states. Papad may be a prime example of this. Not only do the ingredients vary among states, often the preparation style too is a little different, they said.

This creates a problem since under the GST framework, every item is defined under Harmonized System of Nomenclature or HSN code of the product. But what if a product, like papad, is called something different and prepared differently across India, asked tax experts.

The issue has arisen at a time when the government has decided to slap 18% GST on snacks while keeping the traditional snacks out of the tax net, in an attempt to give an equitable opportunity to the smaller companies.

In the past few years, several traditional SMEs that were manufacturing papad have sought to diversify their products. Many of them want to cater to the younger generation. On the other hand, the high-end organized market for snacks is dominated by large organized players – both Indian and foreign multinationals. S-ET

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