Tamil Nadu restaurant saga: Ambiguity over GST food rates in spotlight

The GST rates on goods are based on the harmonised system of nomenclature (HSN) codes

The managing director (MD) of a famous restaurant chain in Tamil Nadu supposedly apologising to Union Finance Minister Nirmala Sitharaman in Coimbatore on Wednesday has triggered a political controversy. Even if the political part of the incident is left aside, the development reminds one of ambiguities in goods and services tax (GST) rates for various products, particularly food items.

The MD, D Srinivasan, had told the minister at an industry event there was 5 per cent GST on sweets but 12 per cent on savouries, and 18 per cent on cream-filled buns, whereas there was no GST on buns! Customers often complain, saying, “Just give me the bun, I’ll spread the cream and jam myself”.

Srinivasan is also president of the Tamil Nadu Hotels Association.

Though the remark left the gathering in splits, the seriousness of the issue of ambiguity of GST rates on food products cannot be just wished away.

GST rates for goods are based on the harmonised system of nomenclature (HSN) codes. But deciding rates is not as simple as it looks. Various disputes have arisen on the placement of these products in HSN codes and schedules under them for determining the tax rates.

Coming back to the GST rates for sweets, savouries, cream-filled buns, and just buns, both sweets and savouries have the same HSN code — 21069099 — but they have different rates since they come under different schedules. Sweets come under schedule I, attracting a GST rate of 5 per cent, and savouries under schedule II draw 12 per cent.

HSN codes of cream-filled buns and just buns are under the same HSN code till four digits but the former as cited above draw an 18 per cent rate and the latter are exempt through a notification.

This is not the first time that an issue has been flagged over GST rates on food products. There have been many disputes heard or are being heard in various forums, including the state-specific Authority for Advance Ruling (AAR).

In a famous case earlier, the Appellate Authority for Advance Ruling (AAAR) of Gujarat held that papad brand Fryums would not attract GST because it was similar to traditional, round papads in all respects.

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

The AAAR held Fryums was a brand and not the generic name of the product. In that sense, Fryums does not change the basic character of the product and it remained papad, it ruled.

Earlier, the Gujarat AAR’s ruling that Fryums would attract 18 per cent GST had stirred a controversy. Some people got the idea that GST would be imposed on papad, depending on its shape.

The Central Board of Indirect Taxes and Customs (CBIC) had to issue a clarification to settle the matter. It tweeted that GST did not distinguish between papad based on shape.

There was a controversy related to the GST rate applicable to eggs too. The AAR, Karnataka, ruled eggs were agricultural produce and transporting them from one place to another would not draw GST. This was despite the tax authorities arguing for its taxability.

However, the GST authorities argued that eggs fell beyond the scope of agricultural produce, according to the intention of GST laws and explanations.

Then there are various other disputes relating to Appy Fizz, rava idli mix, cheese balls, sattu, etc.

Harpreet Singh, partner (indirect tax), Deloitte India, said the multiplicity of rates on different food products was the key reason for classification disputes.

Sandeep Sehgal, partner (tax), consulting firm AKM Global, said the inconsistent and unclear application of GST rates for food items had caused considerable confusion for both businesses and consumers.

Varying rates based on factors such as branding, packaging, and whether an item is processed or unprocessed have introduced complexities, leading to disputes and compliance challenges, he said.

This ambiguity detracts from the primary goal of GST as a streamlined tax system, he added.

Earlier this year, Sitharaman had asked GST officials to bring clarity to classification-related issues at the earliest through appropriate channels.

Singh said the GST Council was looking to end some of these classification issues.

For instance, the GST Council at its meeting on September 9 lowered the GST rates on extruded or expanded products — savoury or salted — (other than unfried or uncooked snack pellets) from 18 per cent to 12 per cent.

However, this was done on a prospective basis, while many industry experts said this should be effective from a retrospective basis to end disputes and litigation.  

According to Sehgal, by simplifying classifications and providing clear definitions, compliance burdens could be eased, which may help improve transparency and reduce litigation.

Code decode
 

> GST rates are based on eight-digit HSN codes taken from Customs tariffs

> The HSN tariffs contain 21 sections

> These are divided into 98 chapters for goods. One added for services

> These together have over 1,200 headings