GST disputes persist due to conflicting interpretations of goods, services

Classification of items for GST rates was done on the basis of harmonised system of nomenclature codes. The codes contain 21 sections. These are divided into 99 chapters, which have 1,244 headings

Disputes relating to the classification of goods and services, which determines the GST rates on individual items, continue to plague the six-year-old indirect tax system. Recently, Finance Minister Nirmala Sitharaman asked the goods and services tax (GST) officials to bring about clarity on classification-related issues as soon as possible through appropriate channels.

Classification of items for GST rates was done on the basis of the harmonised system of nomenclature (HSN) codes. The codes contain 21 sections. These are divided into 99 chapters, which together have 1,244 headings. This system helps in making GST simpler and globally accepted. Eight-digit HSN codes for goods are universal. Common HSN codes apply to Customs and GST. Codes prescribed in the Customs tariff are used for GST purposes. In Customs Tariff, the HSN code is prescribed as chapter (the first two digits), heading (4 digits), subheading (6-digit harmonised code) and tariff items (8 digits).

Some have suggested that the first two digits of the HSN codes be used to sort out disputes. However, others say that this may reduce some disputes but may not address the whole issue as most disputes are being debated at the chapter head level only.

An expert said that a two-digit classification will not help because the intention is to classify products on the basis of complete HSN. "The moment you go for two digits, what we are saying is there would be a broad classification, such as metals. So, copper, tin, brass, aluminium, gold, silver are all metals. That is not the intention. Copper cannot be taxed at the same rate as many other metals because it is used in electrical cables which is a national priority," he said.  

Services tax rates are similarly based on service accounting codes (SAC). While HSN has international standards, SAC was produced domestically to offer clarity to the GST rates.

In a recent ruling, the Andhra Pradesh Authority for Advance Rulings (AAR) ordered that processed pulses obtained after dehusking and splitting the grains are unlike whole pulse grains and not agricultural produce, making them liable to goods and services tax (GST).  

The AAR observed that pulse millers usually carry out the process of dehusking or splitting them rather than farmers or at farms.

As such, pulses—dehusked or split—are also not agricultural produce. However, the AAR clarified that whole pulse grains, such as whole gram and rajma, are covered in the definition of agricultural produce.  

Therefore, processed pulses fall outside the definition of agricultural produce and the exemption from GST is not available to them, said the AAR. However, AAR did not mention the rate of GST applicable to de-husked or split pulses. Experts say 5 per cent GST will be applicable.

Pulses are not the only disputeable item. For instance, crackles sold to companies for use as ice cream toppings may be subject to 18 per cent GST instead of 12 per cent.

An AAR said that crackles sold to ice cream companies should not be categorised as sugar-boiled confectionery but rather as an industrial input.

Although the AAR did not specify the applicable GST rate, experts anticipate that it will indeed be 18 per cent, contrary to the applicant's request for a 12 per cent rate. This decision pertains to a product commonly known as NBS crackle, which is composed primarily of sugar but also contains ingredients like cashew nuts, butter, and glucose.

The applicant primarily supplies this product to ice cream manufacturers such as Hindustan Unilever Ltd and Dairy Classic Ice Creams to be used as a topping for ice creams.

The applicant's argument was based on the topping's classification as sugar-boiled confectionery, which is subject to a 12 per cent GST rate. However, the court held that the product in question was not intended for direct consumption by end users. Instead, it is specifically sold to ice cream manufacturers as an essential industrial input.

Then, there was a dispute over the applicable GST rate on cheese balls. It became the bone of contention between a company and the tax authorities.

While the GST authorities and the Uttar Pradesh AAR kept the tax rate under 18 per cent because cheese balls did not fall under any of the specified food items, company Savencia Fromage & Dairy Pvt Ltd argued for its inclusion under cheese, which attracts a rate of 12 per cent.

The company intended to make cheese balls from bread. It argued that the presence of items other than cheese in the balls did not affect their classification as cheese, provided that the goods retained the character of cheese.

After losing its case in the AAR, the company approached the Appellate Authority for Advance Ruling (AAAR) in the state and argued that cheese is the most important ingredient in its product, accounting for 55 per cent of the total volume. It argued that the product cannot be made without cheese.

Savencia Fromage said the batter and bread coating are not essential and can be easily substituted. It is the only cheese that differentiates the impugned goods from any other breaded product.

The AAAR agreed with the company's argument and set aside the AAR order of 18 per cent GST on the food item.

Earlier, the Karnataka AAR ruled that eggs are agricultural produce and transporting them from one place to another would not attract GST. This was despite the tax authorities arguing for their taxability.

The ruling was pronounced on an application submitted by SAS Cargo, which transports eggs and hatcheries by rail.

The AAR sought to know the government's position from the office of the commissioner of central tax, Bengaluru South GST Commissionerate. The assistant commissioner replied that according to the GST laws, agricultural produce is any produce out of cultivation of plants and rearing of all forms of animals, except the rearing of horses, on which either no processing is done or, if done, does not alter the essential characteristics of the produce.

However, the assistant commissioner said egg production appears to be a commercial enterprise, not an agricultural activity. The office was of the view that GST laws and clarifications given under them are intended to give relief to farmers who, in addition to cultivation, may engage in certain agro-based activities such as animal husbandry, pisciculture, and sericulture.

The office was of the view that eggs fall beyond the scope of agricultural produce, according to the intention of the GST laws and explanations.

However, AAR ruled that eggs that are not further processed are covered under the definition of agricultural produce, according to the classification made by the Central Board of Indirect Taxes and Customs (CBIC). It also ruled that services for transporting eggs are exempt from GST.

In another case, AAAR of Gujarat held that papad fryums would not attract any GST as they are similar to traditional round papads in all respects.

In this connection, the appellate authority modified the ruling of AAR which had held that Fryums would attract 18 per cent GST.

The AAAR held that Fryums is a brand and not the generic name of the product.

Entry number 96 of the notification issued on June 28, 2017 by the CBIC mentions papad, which attracts zero GST rate. However, the term papad has not been defined in the GST Acts, the AAAR emphasised.

The Appellate Authority resorted to the common sense and meaning of traditional parlance to explain that a papad is a thin Indian wafer that is served either as an accompaniment to an Indian meal or as a snack. It noted that the description of the product is "papad by whatever name is called".

In that sense, Fryums do not change the basic character of the product and they remain papad, it ruled.

Earlier, the Gujarat AAR's ruling that Fryums would attract 18 per cent GST had stirred a controversy. Some people suggested that GST will be imposed on papad depending on its shape. One person had tweeted that a round papad is exempt from GST, and a square one attracts the tax. The CBIC had to issue a clarification to settle the matter. It tweeted that GST does not distinguish papads based on shape.

"Papad, by whatever name known, is exempt from GST," CBIC had tweeted.

Then, there are various other disputes relating to parathas, flavoured milk, Appy Fizz, rava idli mix, and other items.  

M S Mani, partner at Deloitte India, said while there is a clear need to avoid classification disputes, it must be remembered that new products and services will continue to emerge with rapid technological advancements, and it will be difficult to keep pace with their classification from the GST perspective.

Another expert said on the condition of anonymity that the problem arises as more and more products get introduced in the market, which were not in existence when GST classification on the basis of HSN codes was made. As new products evolve, classification has to catch up with them and there is a time lag in doing so.

To cite an example, he said when the GST classification of HSN codes was made, rotis were made round. However, ID Fresh Food of Bengaluru came out with paratha with square ones. "How can HSN handle it," he wondered.

Krishan Arora, partner at Grant Thornton Bharat, said there are GST disputes relating to online gaming, salaries to overseas persons on deputation to Indian subsidiaries of multinationals,  input tax credit (ITC) eligibility in the construction services, transfer of leasehold land rights, taxation of intermediary services too. 

While the finance ministry has clarified certain issues such as online gaming, clarity from it is awaited on issues like ITC eligibility in the construction services, transfer of leasehold land rights.

Sandeep Sehgal, tax partner at AKM Global, said current challenges in GST classification, such as the inconsistency in tax rates for identical commodities, present significant hurdles for businesses.

"Despite the availability of the advance ruling authority, which aims to provide clarity, its underutilisation persists due to complexity and limited awareness," he said.

The issue gets complicated because of the multiplicity of the GST rates. There are four main GST rates – 5 per cent, 12 per cent, 18 per cent and 28 per cent. Besides, there are cesses over 28 per cent for luxury cars, aerated drinks etc. Jewellery has less than 5 per cent tax rates, but adding the cost of making jewellery and customs duty on imported stuff makes the total  GST rate exceed 10 per cent.  

There were talks of rationalisation of the GST rates, particularly the merger of 12 per cent and 18 per cent, but it was not taken up due to high inflation.

Sehgal said the problem of disputes regarding the classification of items may persist till the time there are multiple tax rates under GST.

"Efforts should be made to reduce the categories, which was the initial idea," he said.

Anomalies may still persist, and establishing a dedicated authority to streamline the classification process, offer clear guidelines and facilitate communication between businesses and regulators could be one solution, Sehgal suggested.