High GST on dairy products like Ghee is killing the organised dairy Industry

India is the largest producer of milk in the World with around 400 gms per capita consumption and growing at rapid pace. In fact, milk has got 99% household penetration - much higher than wheat or rice - and is used in various Indian diets, consumed right from birth (during pregnancy to first external food for infants) till death (as Ghee used on pyre). Such is the importance of milk products in Indian households.

However, with the introduction of GST, lot of disparities have been created in milk products especially products like Ghee as detailed below:

•        Ghee represents largest consumed dairy product in India after liquid milk and curd, with estimated volumes of around 4.3 million MTs during 2018.

•        Ghee has been traditionally used for cooking purposes in Indian households. Traditional Indian sweets like Peda, Gulabjamun etc. are also made using ghee as a cooking medium.

•        In 2018, the total ghee market in India was valued at around INR 1990 Billion (US$ 28 Billion), growing at a CAGR of 11%.

•        Ghee market in India is largely occupied by unorganized players, accounting for around 83% of the entire ghee sales in the country.

•        The organised Ghee industry has received serious setback post implementation of GST, wherein the tax rates for this category have been increased from 4-5% under VAT earlier to 12% under the new regime.

•        This had led to widespread adulteration, sale of Ghee as other ingredient like Cream and going back to unorganised route to evade taxes.

Government needs to re-consider this high rate of tax under GST for Ghee because of following reasons:

1. Ghee is the main source of fats as nutrition (good fats) for Indian households and is much superior nutritionally as compared to other sources of Fat like edible oils, etc.
2. Ghee making is the traditional way of conserving milk at domestic level wherein, SNF part of excess milk is used for direct consumption in form of milk, curd, buttermilk or converted to preserved forms like Chenna; while fat is extracted in form of cream and converted to Ghee. Therefore, Ghee is nothing but preserved form of milk.
3. Further, Ghee drives most of the value extracted from milk at domestic level since rest of the products are consumed immediately and hence, imposing such high level of taxes just for conservation of milk is not justified.
4. Ghee making requires very little value-addition and being made traditionally in each household, it is part of normal Indian household food product. Hence, being considered at par with high value-added or highly processed foods in terms of GST classification is uncalled for.
5. Since it is a basic item made at home for generations, Ghee is even today a highly unorganised market with hardly 15% of the volume handled in branded packaged form. In such scenario, incidences of high taxation on packaged Ghee is discouraging the organised trade and is a disincentive rather than helping the industry grow. This has already led to reversal of the trend and the very objective of the Government to extract higher taxes out of this category is becoming counter-productive.
6. Further a large quantity of Ghee is sold in the rural areas and in most of the cases, even milk producers sell their milk to dairies and purchase products like Ghee from the market out of convenience, consistency and quality. Therefore, high taxation to farmers on their own produce is draconian to the least.
7. Even in case of organised dairy industry, Ghee derives the highest value out of milk procured by them. Further, Ghee is a by-product in the process of preservation at organised dairies, the other part being Skimmed Milk Powder (SMP). When one part of the value-chain i.e. SMP is considered as dried milk and subjected to 5% GST, there is no reason, Ghee is subjected at higher GST rate.
8. Also, liquid milk being exempt from GST, there is no incidence of input tax credit available and therefore, the burden of 12% GST on Ghee becomes unbearable for the dairies.
9. Ghee is a traditional cooking medium for Indian food. Therefore, just like any other necessary food items, Ghee should be subjected to lowest tax rate under GST. Further, other cooking mediums like edible oils are already subjected to lower tax rate of 5% under GST and therefore, such high tax on Ghee is unjust.
10. It is also unjust to equate Ghee with other milk products like Table Butter or Cheese in terms of taxation, which are Western products and consumed by more affluent sections of the society.
11. Further, it does not make any sense to import low-quality fats like vegetable oils at lowest customs duty & local taxes and instead tax high quality fats produced by local farmers at higher rates.

Impact of high GST:

•        Higher incidence of GST on Ghee, which is the most valuable part of milk, is hurting the dairy farmers who are already under lot of stress because of low realisations from milk over last few months. Further, being part of basic farm produce with little value-addition and limited organised market, it does not suit to be a candidate for the high tax rates as defined by the Government.

•        With lower realisations from SMP over more than a year and stressed financials, dairies are unable to pass on the high tax burden on Ghee on either side of the value-chain.

•        Due to this, many players are resorting to large-scale adulteration in Ghee to better their realisations while others are selling Ghee under declaration of Cream, which is exempt from GST and hence evading taxes.

•        In the process, consumers are being provided with sub-standard products and Government is losing the revenue while farmers are subjected to taxes.

Solution:

•        To place Ghee under the lowest GST slab of 5% in line with other necessities and similar cooking mediums like edible oils.

•        To also re-classify Cream from being exempt to 5% GST in order to check tax evasion.

Even after classifying Ghee at 5% GST rate, the differential loss to the Government is hardly Rs. 200 crores per month, which is hardly anything compared to more than Rs. 1 Lakh crore GST collection. However, by supporting dairies in this endeavour, Government would be helping farmers realise much higher value out of Rs. 10 Lakh crores worth of milk they produce annually!