JANUARY 25, 2018

By Lukose Joseph, CA & Anil P Nair, CA

CLASSIFICATION of goods under indirect tax laws followed Harmonized System of Nomenclature (HSN). It is very important to determine the rate of duty. Central Excise and VAT Laws invited a plethora of cases in determination of rate/duty based on divergent views between the Department and the Assessees. With reduction of slabs and unification of rates, the gravity of the issue was heading south to a certain extent.

GST initially envisaged a single rate, but the Indian realities took over and we ended up with several rates. A Single rate is regressive being with no distinction between luxury and essentials, yet for multiple rates, we have classification a cause for permanent disputes and litigation. Thus we have potentially imported status quo into what could have been a game changing fiscal reform.

Let us consider an example from the previous tax regime.

In the case of Amardeo Plastic industries V CCE - 2007-TIOL-240-CESTAT-MUM it was held that parachute coconut oil is vegetable oil under chapter 15 and not preparation for use on the hair being there is no marking on package in spite of advertisement claims so. In the case of Aiswarya Industries v CCE - 2008-TIOL-2846-CESTAT-MAD it was held that in spite of use of trademark it could not be identified as hair oil in the absence of specific label.

In the case of Shalimar Chemical Works (2008) 12 VST 485(WBTT) (2010) 28 VST 52(ORI HC DB) it has been held that except in southern states coconut oil cannot be treated as edible oil but has to be treated as hair oil.

Circular No 890/10/2009-CX Dated 03.06.2009 explained that coconut oil in containers up to 200 ml is to be classified as cosmetics including hair oil under Heading 3305 and not as edible oil under chapter 15.

The confusion as to classification is thus a never ending phenomenon as is inconclusive. In Central Excise and VAT regime, the largest number of disputes arrived on classification of items. The complexity was addressed to some extent by bringing uniform rates for many items especially in Central Excise.

In the case of Central Excise regime, where duty was being charged at a single point (at the point of manufacturing/import), the issue was containable to that level.

But in GST which subsumed all indirect taxes and followed one Nation one Tax principle, tax is being charged at each point of supply of value addition. Hence the issue gains proportion. In other words, authors believe that the single largest legal issue in GST regime is dispute on classification, if a consumer product passes at least 4 levels like manufacturer, stockist, wholesaler, and retailer to reach the final consumer. If a dispute on classification and thereby in tax rate arises at one point, the ripples go down the chain to reverberate and all links become distressed.

For example, if the rate of tax as per the First supplier is say, 5% and Department is of the view that it is 18%, the Department will charge the difference of 13 % and a penalty under Section 122 for an equal amount for next 4 levels, which will make the extra payment to 104% of the sale price. In other words, the extra payment will be more than the sales price! (Let us keep aside the discussion on the provision for imprisonment under Section 132 to some other time).

Remember, no input tax is allowed of additional tax paid and, of course, not to mention the Penalty involved [section 17(5)(i) of CGST Act refers] .

The errors of classification are not confined to the ingenious duty evader, which unfortunately seems to be the primary assumption in drafting of tax laws of recent times. It involves classifications from genuine mistakes, ignorance, hindsight, copying peers, consultant errors of judgment and anything else. It could pose as an enigma in front of a supplier of composite supplies like a decision to classify a wrist watch made of gold. Is it still a Watch or has it become precious Jewel? Of course, you can answer that question but still the same is contentious.

The issues of classification are debatable to any length and you will not have a final decision may be even in 10 years at current pace, even from the Supreme Court. Advance Ruling Authority may provide some relief to the pre-warned. How effectively advance ruling authority is working in many states is a matter of concern for trade and industry. Again, who all knows there are multiple options in Schedules in the first place to decide to go for an advance ruling?

Under earlier indirect tax regime, the remedy for an unfavorable order passed by the Appellate Tribunal was to approach the Supreme Court directly under Central Excise law and to approach respective High Courts under VAT law.

In many cases, the High Court refuses to interfere when taxpayer takes the route of writ petition. Court orders to come through the remedy available from the right authority below it which may prolong the procedure. [M/s. Jaap Auto Distributors Vs. The Assistant Commissioner of Customs - 2018-TIOL-62-HC-MAD-CUS].

GST proposes to bring in a transparent, interlinked economy bound together by the golden thread of GST chain. The Department has the complete picture of the passage of goods through this chain. A detection of total revenue loss out of an error at some point along the chain is not at all difficult and the recovery could be done even by allowing credit of differential rate through the input chain. This could be done with minimal discomfort to those involved and without disturbing the peace prevailing in the supply chain through penalties and prosecutions which will not be in the interest of our fair objectives of business friendly policies and above all, cost savings.

We hope that the dispute on classification shall be limited to the erroneous point of sale or some mechanism be evolved to transfer additional tax paid/credit from that point on account of demand from department due to dispute in classification and no penalty be charged on subsequent points of sale.