APRIL 29, 2024

By S Murugappan, Advocate

MAKING a classic Malabar Parota, a delicacy from the Malabar region, with the known ingredients appears to be simpler. But taxing it under GST laws turns out to be a tough proposition. The question that at what rate this is to be taxed (and ultimately the person consuming it) is elusive. Senior level officers in various states analysed the issue to give 'Advance Rulings'. Ministers in the GST council discussed it in the past. This month a judge of the Kerala High Court pondered over it and pronounced his judgement.

There are various varieties of Parotas/Parathas, such as Onion Parota, Methi Parota, Laccha Parota and Alu Parota. The principal ingredient for all these varieties is the same, that is, 'wheat flour'. The other ingredients are water, edible vegetable oil, salt, antioxidant etc. The products under reference are branded and sold in pre-packed condition in supermarkets as semi-cooked Parotas. These are only to be preheated on a medium flame for a few minutes with or without addition of oil and the Parotas are ready for eating. There are several brands of packed Parotas sold across India, predominantly, catering to the needs of bachelors and working couples.

Now, why there should be a tax dispute on these Parotas?

Levy of GST on various products is based on entries, with classification codes and description, appearing in different Schedules that form part of GST Rate Notifications. Thus, one has to go by the specific entry or the closest entry to decide its classification or code and then apply the rate as per the Schedules. For correctly determining the code for a particular product or for resolving any disputes in respect of the entries appearing in different Schedules, one has to fall back on the Schedule to the Customs Tariff Act. This Schedule to the Customs Tariff, is a full-fledged commodity description code based on the Harmonised System of Nomenclature developed by the World Customs Organisation (WCO). This classification system developed by WCO is adopted by almost all the countries of the world for administering taxes. Standardised classification code with commodity description ensures that the various stakeholders in trade, including Government authorities understand and administer tax rates and policies for facilitating trade within the country and across borders.

Now, for Parotas, two competing codes with two different rates vie with each other. These are Codes/Headings 1905 with 5% and 2106 with 18%. This is the starting point for the dispute.

Heading 1905 in the Customs Tariff Schedule refers to "Bread, Pastry, Cakes, Biscuits and other bakers' wares…" There is another heading, 2106, which covers "Food preparations not elsewhere specified or included". Bread falling under 1905 is eligible for total exemption from payment of any GST. Khakhra and plain chapati or roti are eligible for 5% GST against entry 99A of Schedule I to the GST rate notification. Interestingly for these two items, both headings 1905 and 2106 are mentioned. However, other food preparations falling under heading 2106 attract 18% tax.

In 2018, Modern Food Enterprises Private Limited approached the Kerala Authority for Advance Ruling seeking a ruling on classification and rate of tax for its packed products, Classic Malabar Parota and Whole Wheat Malabar Parota. It was the case of the company that the product should be eligible for total exemption under entry 1905 by considering it as the Indian variety of Bread. The authority gave advance ruling to the effect that these are to be considered as 'other food preparations' only and not as Bread and, therefore, is to be subjected to 18% GST (2018-TIOL-237 AAR-GST). The issue was carried forward to the Appellate Authority for Advance Ruling. That authority also concurred with the findings of the Authority for Advance Ruling. Thus, the company ended up with a ruling for 18% tax on its Parotas.

In 2020, ID Fresh Food (India) Private Limited approached the Authority for Advance Ruling in Karnataka with the same issue. It also ended up with getting a ruling that the Parotas packed and sold by them should fall under entry 2106 as other "food preparations" and not entitled for any concessional tax but they should attract 18% GST (2020-TIOL-114-AAR-GST). When it filed an appeal against this decision before the Appellate authority for Advance Ruling, the issued ended up in a twist. It was held that already Directorate General of GST Intelligence, Chennai is investigating the matter and hence when proceedings are pending before the departmental authorities, advance ruling cannot be sought for. In the result the ruling given by the Authority for Advance ruling earlier, itself was declared 'void' by the Appellate Authority (2020-TIOL-57-AAAR-GST).

In 2021, M/S. Vadilal Industries Ltd in Gujarat approached the Authority for Advance Ruling in Gujarat with the same issue. There also the Authority for Advance Ruling consisting of two members, after analysing the issue rendered a ruling that the Parotas manufactured and sold by them will be classifiable under heading 2106 and will attract 18% GST in terms of the relevant entry in Schedule-III of the relevant GST rate Notification.The appeal filed before the Appellate Authority for Advance Ruling by the company was dismissed by the Appellate Authority in 2022 (2022-TIOL-33-AAAR-GST).

The core reasoning adopted in these various rulings is that these Parotas under discussion are not in ready to eat form as is required for coverage under heading 1905. They need to be further processed (heated) to make them edible; that heading 1905 basically refers to bread and bakery products and Parotas will not fit in that description. The authorities also referred to the General Rules for Interpretation of the Schedule to the Customs Tariff Act and held that even if it is assumed that both Headings 1905 and 2106 are equally applicable, then, as per rule 3(c) of the these rules, when there are two equally applicable headings the latter heading is to be preferred and on that basis also, heading 2106 which covers other food preparations will be appropriate.

Thus, everywhere, the overtures of Malabar Parota for tasting it with a lesser tax burden, were spurned by the taxing authorities.

Now comes the Modern Food Enterprises Private Ltd's appeal to the Kerala High Court against the decision of the Appellate Authority for Advance Ruling telling them that they should classify their product under heading 2106 and pay tax at 18%.

Before the Kerala High Court, the Company, strongly and strenuously laid out their case for classifying these Parotas under heading 1905. It was submitted that: 1) The ingredients used for making the products referred to under heading 1905 and the ingredients used in the preparation of these Parotas are the same. 2) The assumption that only European loaf of Bread should fall under the description Bread against heading 1905 is not correct. 3) Across the world there are various varieties of Bread made and consumed; flat-breads whether leavened or unleavened are popular in Middle East, Asia and Africa. Pita Bread which is a leavened flat-bread is from Lebanon. Pizza is a Bread which is of Italian origin and now consumed across the world. 4) Flat-breads are indigenous to the Indian subcontinent. 5) Roti is the generic name for Indian flat-breads. It can assume different forms like, chapati, roomali roti, Nan, Kulcha, Missi roti etc. 6) The word 'bread' is not defined in Heading 1905. 7)Across India, in fine dining restaurants, these are described in the menu cards under the heading 'Indian flat-breads'. 8) A judgement rendered more than 70 years back by the Andhra Pradesh High Court in the case of Kayani & Co Vs Commissioner of Sales Tax was relied upon, where the High Court held that Parota, Chapati etc. can be called 'bread' and observed that the intention of the legislature was to include all kinds of bread which are consumed by the citizens of India whether prepared in different ways or called by different names and there is no justification for limiting the scope of the term 'bread' to double roti 9) Bread mentioned under entry 1905 is a 'genus' and the Indian flat-bread will be one of the 'sub-divisions'. 10) The other food preparations coming within the scope of heading 2106 are various, assorted, miscellaneous products without any common thread running among them such as protein concentrates, pan masala, sugar syrups, non-alcoholic beverages, food flavouring materials etc. and thus heading 1905 will be more specific for Parotas.

On behalf of the Government, it was argued that the entries relating to the classification and the entries appearing in the notifications have to be strictly interpreted and there is no basis to expand their scope;that as the product is not a plain chapati or roti, it is not eligible for 5% concessional tax and that these Parotas are not bakery products.

Overruling these objections and accepting the arguments of Modern Food Enterprises (P) Ltd, a Single Judge of the Kerala High Court, on 2.4.2024, delivered a judgement holding that the Parotas manufactured and sold by them in semi-cooked condition are classifiable under heading 1905 and eligible for 5% concessional tax. The learned Single Judge observed that Parotas are more akin to goods described in 1905 than in 2106by applying Rule (4) of the General Rules of Interpretation to the Tariff (2024-TIOL-635-HC-KERALA-GST).

It'll be interesting to note that the Oxford Dictionary of English refers to Parota as a 'flat thick piece of unleavened bread, fried on a griddle'. In Merriam Webster Dictionary, Parota is described as an 'unleavened Indian wheat bread that is usually fried on a griddle'.

Now, as these Parotas from Modern Food Enterprises (P) Ltd in Kerala have been finally fried in the Tax griddle in Kerala, there, they will attract 5% tax. On the other hand, Vadilal Industries in Gujarat will be paying 18% tax on the very same Parotas. (Withering away of one nation, one tax concept?). What will be the tax, when Vadilal Industries' packet of Parotas are sold in Kerala by way of supplies across the States? It will be of much interest to watch the litigation that may arise in this connection. But what is certain is that if you buy Modern Foods packet of Parotas in Kerala you pay 5% GST and if you travel to the State of Gujarat and buy Vadilal Parotas you will pay 18% GST.

The question that arises in this context is, when bread is exempt from GST and Roti is chargeable to 5% tax, why a differential treatment for packed Parotas irrespective of their classification ? This policy by the Government authorities to keep tax at higher rates on such packed foods appear to come out of the age-old concept that these are products from organised sector and from well-established corporates and the consumers who buy these are affluent and, therefore, can afford to pay higher tax. The classic example will be that of rice prepackaged and labelled, which attracts GST whereas loose rice or unlabelled packets of rice are exempt from GST. Similarly pre-packaged and labelled Namkeen attracts 18% tax while other Namkeen will pay 5% tax. In all these cases, the products sold are fundamentally the same . Differential tax treatment for corporates can be understandable but ultimately the consumer is paying for it and that too why in respect of food products also, such a treatment is to be retained?

Enough of this digression. Now coming back to Parotas, do you think this is the end of the story on taxing Parotas? Presumably, not. One can expect the Government to appeal to the Division Bench of the Kerala High Court. Whoever loses the case is, again, likely to go ultimately to the Supreme Court and the Malabar Parota will have the distinction of getting its tax rate settled by the Highest Court of the land. And this process may take a couple of years or more depending upon the workload in the courts;and imagine the amount of time, energy and money that may be spent by that time, by company officials, taxing authorities, intelligence wing officers, lawyers, chartered accountants and the judges with all their supporting and back-office staff at every stage, for settling the tax rate for this seemingly simple Parota.

The question that looms large is whether taxing food items should be so taxing.

[The views expressed are strictly personal.]

Also, by the author - A 'parota' hogs the limelight - What an Id(ea) sirji!