Several companies may face challenges on product categorisation under the goods and services tax (GST), experts said. This could revolve around possible questions such as whether Pepsi’s Nimbooz is lemonade or pulp juice, Appy Fizz is an aerated or juicebased drink, and Red Bull is an aerated or energy drink, they said. That’s due to lack of clarity on how to tax some products and a backlog of cases regarding classification ambiguities, the experts said. The answers to those questions will determine the tax rate. For instance, lemonade is taxed at 28% but pulp juice at 12%.
“There are still some products that have no clear classification, which could lead to confusion and potential litigation,” said Pratik Jain, partner, national leader, indirect tax, PwC India. “Also there are situations where the rates are dependent on end use and it’s almost impossible for the seller to ensure that the product is used as intended. It might be a good idea for the GST Council to set up a committee to look at these classification issues.” The government’s Harmonized System of Nomenclature (HSN) stipulates a code for every product category and a chapter dedicated to it in the tax manual. But HSN is not without flaws, said tax experts.
The first two digits of the HSN code represent the product category and the next two denote the subcategory, said Sachin Menon, national head, indirect tax, KPMG India. “Hence, wherever there is a difference in GST rates under the same product category or differential tax treatment based on the price or end user of certain products, etc., it is a recipe for future classification disputes and litigation,” he said. “That’s why we suggest uniform GST rates for each category.” ET had reported on March 25 that product categorisation could become an issue under GST, dealing with hypothetical queries such as whether Kit-Kat is a chocolate or a biscuit, Parachute is hair oil or edible oil, and Vicks tablet is a medicament or confectionery.
Companies Looking for Legal Solution
While some of these questions seem to have been resolved under GST, others remain unanswered. Legal experts point out that many companies are looking to approach courts or quasi-judicial bodies such as the Authority of Advance Rulings (AAR) in the coming months. Currently there is no AAR for GST, but it could be set up by February. “The objective of GST was to reduce the classification disputes which we had witnessed in the erstwhile regime,” said Abhishek A Rastogi, partner at Khaitan & Co. “However, due to multiplicity of rates, the objective has not been fully attained.
The advance ruling weapon has not been used very rigorously by the businesses so far but will be used in the days ahead.” In some cases, the end-user-based taxation has led to confusion, experts said. Fertilizer is taxed at 5% if used for agriculture and 18% for anything else. Sellers get a written declaration from buyers that they will only use it for agricultural purposes. Experts said that such a declaration may not have any merit and it’s difficult to actually check the end use. The categorisation issue has also hit some niche products, said experts. “For instance, lot of imports related to kitchen and household appliances fall in two different categories,” Rastogi said. “The problem becomes big when the customer highlights that the competitor charges a lower rate.”