The GST Council on it’s 49th meeting on February 18, 2023, inter alia, reduced the GST rate on pencil sharpeners from 18% to 12%. It is out of the ordinary for the GST council to decide on tax rate for specific goods or services. Most past GST Council decisions required newspapers to publish dedicated articles listing out goods and services that have become costlier/cheaper. So what prompted this measure this time?

Pencil sharpeners were taxed at the rate of 12% since inception of GST. The GST Council on its 47th Meeting held on 28th and 29th June, 2022 increased this rate to 18%. This increase was based on the recommendations of the Group of Ministers (GoM) on rate rationalisation working on reducing duty inversion. In their interim report, the GoM had recommended rate change in about 15 groups with multiple subitems including pencil sharpeners. The interim report is not available in public domain and the agenda discussion points and minutes of GST Council does not contain any specific discussions on Pencil Sharpeners. However we can infer the reasoning behind the rate change.

The council removed
‘Paper knives, Pencil sharpeners and blades therefor‘
from the 12% slab and combined it with
‘Other articles of cutlery (for example, hair clippers, butchers’ or kitchen cleavers, choppers and mincing knives,); manicure or pedicure sets and instruments (including nail files)‘
in the 18% slab.
This entry comes right in middle of other kitchen cutleries. So it would be safe to assume that the rate increase is to counter the duty inversion where steel is taxed at 18% and cutting stationary are taxed at 12%. So far so fine, so what prompted the roll back?

In all likelihood this change is consequent to ruling of the Gujarat Authority for Advanced Rulings (AAR) in the case of Doms Industries. Doms is well known manufacturer of stationaries. Before we go into the facts of the case, we have to understand two concepts: Composite and Mixed supply in GST

Composite Supply means a supply consisting of two or more taxable supplies of goods or services which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply.

Mixed Supply means two or more individual supplies of goods or services made in conjunction with each other for a single price where such supply does not constitute a composite supply.

Composite supply is taxed at the tax rate of the principal (main) good or service. Mixed supply is taxed at the rate of highest tax rate applicable to any component in the mix.

It is a common practice in the stationary industry for the manufacturers to sell a pack of 10 pencils with one sharpener and one eraser together (hereafter the pack). As long as the tax rate of pencil sharpener was at 12% it did not matter how the supply of this pack was treated under law. The tax on the principal good – pencil as well as the highest tax rate among the components was same at 12% (eraser is taxed at 5%, pencil and sharpeners at 12%). However, with the rise in tax on sharpener, it became pertinent to classify the supply of the pack.

When treated as composite supply the pack will be taxed at 12% and treated as a mixed supply it will be taxed at 18%. This contention was placed before the Gujarat AAR which ruled that the supply of the pack (10 pencils with a sharpener and eraser) is mixed supply and the whole product has to be taxed at 18%. This would mean 6% higher tax on 10 pencils and 13% higher tax on a eraser just because a sharpener is included in the pack. The ruling was made on December 30, 2022.

Most likely, this ruling has prompted the GST council to revise the rate hike on pencil sharpeners alone in the immediate next meeting. Though the prompt remedial action is welcome, it also raises questions on the process followed in determining rate changes and why industry input was not sought before the change was introduced.

We can not expect the GoM to go over every list item, however the GoM is provided secretarial assistance by the officers of CBIC and finance ministry. Shouldn’t they have thought through / deliberated on each of the item? How many of us have have ever purchased a sharpener separately? Did they even deliberate or did they just rely on the data on input credit refunds claimed to come up with the list?

The GoM further claims that,
At the same time, there was concern that across the board increase in the GST rates on account of such corrections may impact the consumer price in certain cases or may be perceived as impacting the common man adversely. This concern was further amplified given the current scenario of persisting inflation. Under these circumstances, the GoM has adopted a cautious approach while making its suggestions (e.g., GoM is of the view that even though items like utensils, tableware, tractors, pharma, aggarbatti, certain agricultural machinery etc may have acute inversion, any rate calibration in these items for correcting this inversion may not be
desirable at this stage for the above stated consideration). How come good like pencil sharpeners that’s naturally linked to children and education not draw the attention of the members of GoM when aggarbatti could?