Differential Tax Levy under GST

Differential Tax Levy under GST: Food Firms May De-Register Trademarks

The government’s Move to charge on trademark food brands is leading several rice, wheat, and cereal manufacturers to consider de-registering their product trademarks.


Irked by the June 28 central government notification fixing a 5 per cent goods and services tax (GST) rate on food items packaged in unit containers.   Registered brand names, the industry has made several representations to the government to reconsider the differential tax levy, which these players say is creating an unlevel playing field within these highly-competitive and low-margin industries.



Sources say that the move has affected the packaged rice industry the hardest and allowed the unregistered market leaders, India Gate and Daawat, to gain the advantage as compared to other registered brands such as Kohinoor and Lal Qilla.


Smaller players are even more worried about this enhanced rate of tax (against the otherwise ‘nil’ rate) on registered brands, which they claim results in a severe loss of competitiveness. Reacting to the situation, many of these manufacturers are even taking the drastic step of re-registering their trademarks to place themselves on the favorable side of the playing field, much to the dissatisfaction of the rice lobby.


The Body has lodged a formal complaint with the Ministry of Finance and the GST Council over rice exporters and traders de-registering their trademarks to escape the GST dragnet.


Differential tax treatment between registered brands vis-a-vis brands


What makes the difference even starker is the fact that the enhanced tax rate will apply to only those brands with trademarks in force and not others.


The differential tax treatment between registered brands vis-a-vis brands for which registration applications are pending, brand names which are registered outside India or unregistered brands which spend substantial amounts on brand building and operate at similar commercial levels may lead to unequal treatment of equals, without any intelligible differentia.


Prior to the GST regime, branded food products were charged a standard central excise tax, regardless of whether they had trademarks. Sources say that this classification was not acceptable to the GST Council as it taxed even micro-brands, to the disadvantage of smaller manufacturers.


GST affected Rice Manufacturers


To rectify this, the council decided to levy a tax only on trademark products. However, instead of providing an advantage to these smaller players, the distinction has led to severe uncertainty in the market and also raised issues of constitutional irregularity, note experts.


Although these affected manufacturers are said to be looking at alternate possibilities, any applications for deregistration of trademarks will be at the discretion of the trademark registry, according to Section 58 of the Trademarks Act, 1999. The request could also take a considerable amount of time as no time-period is prescribed to process the application. Until the registry confirms the request in writing, the mark will continue to remain as registered within the meaning of the Act and as a result, could continue to be liable for the higher rate of GST, adds Dutt.

Trademarks are representative of quality and origin

According to Dev Robinson, national practice head, IPR, Shardul Amarchand Mangaldas, trademarks are representative of quality and origin.


The government’s decision to tax registered and unregistered brands differentially seems counterintuitive to developing brand worthiness in these highly competitive markets.


Experts have also raised health and quality concerns associated with deregistration of trademarks. Although the Food Safety and Standards (Food Products and Food Additives) Regulations 2011, which lay down safety standards for food products, do not differentiate between trademark and non-trademark goods, it could become harder for the authorities to ensure compliance with these requirements for non-trademark and imitation products.


Registration of trademarks is also a prerequisite for recorded before customs, which tackles issues of counterfeit import and export. Deregistration of a trademark can hamper such activities. If the government’s intent was to impose taxes, it should have been on brands per se but not targeted on registered marks.


Companies having registered trademarks abroad who choose not to obtain trademark registrations in India would also have stronger protection in case of such passing off actions.While experts are in agreement that the present scenario poses a unique challenge for the government and the affected industries, they also highlight that establishing an alternative approach may prove difficult. All eyes are on the Saturday GST Council meet in the hope of finding a viable solution to the issue.