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Classification & Exemption in GST
CA Madhukar N Hiregange
Introduction
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GST - from July 2017
GST was expected to reduce exemption (Done) , broad base tax ( Done)
and reduce the disputes ( in classification many disputes possible).
In CE, classification disputes in 1990s disappeared when majority of
products in one category were taxed equally and rates were reduced.
Some cesses – expected parallel economy find many reasons to
continue & not to join mainstream: Those first time in above 5% +
higher bracket products also may misclassify etc.
Rates of Goods At A
Glance
S. No Schedule Rate of CGST No. of Categories of items
covered
01 Schedule I 2.50% 263
02 Schedule II 6.00% 242
03 Schedule III 9.00% 453
04 Schedule IV 14.00% 228
05 Schedule V 1.50% 18
06 Schedule VI 0.125% 3
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IGST Rate would be x 2 = Double
Rates of Services At
A Glance
S. No Rate of
CGST
Sample Entries
01 2.50% Transportation of Passengers/ Goods ( No ITC), Rent a Can
(Incl fuel) , leasing of aircraft. Tour operator, specified
manufacturing …,
02 6.00% Supply of Foods & Beverages- No a/c, Container transport,
foreman comm, IPR on IT,
03 9.00% Maximum here-
04 14.00% 228
05 1.50% 18
06 0.125% 3
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IGST Rate would be x 2 = Double
Classification
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•Classification means ascertaining the tariff heading/sub-heading
under which product is categorized.
•Classification is important to determine duty structure & also
examining exemptions available.
Rules of interpretation - essential for classification – As perCustoms Tariff which is fairly developed in terms of judicialprecedents.
Customs Tariff based
on HSN
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The Customs Tariff Act based on the Harmonised System of
Nomenclature (HSN) to be followed - uniform classification
Under present Customs / CE law – classification involves
determining headings, sub headings of 1st Schedule to CTA
Eligibility of exemption – reference to tariff heading
Impact of incorrect
classification
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Classification - tax
liability depends on
correct rate of tax.
For correct rate of tax -
correct classification
necessary.
Incorrect classification
- serious impact on
business of customer
impact on relationship
customer.
Possible ill effects of incorrect
classification
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• Additional liability at later stage after correctly classifying ( maybe no
credit?)
• Demand from department & customer not willing to pay.
• Customer willing to pay tax [when received invoice/debit note within
filing of next year Sept return] but not willing to pay interest and penalty
• Missed out eligible (correct) exemptions which were available if correct
classification was done – Make one uncompetitive.
• Transaction cost added by litigation cost, Compliance rating, Suppliers
Poor image .
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Methods to arrive at correct
classification
Understanding of Business: Vendors Customers Profile /
SWOT of business, Technological challenges: Understand
the nature of business – Differences of activities by referring to:
Company’s website
Technical Write-up
Scientific / Technical terms / standards (Eg: Pharmacopia)
Description of products given by sales and marketing team of company– especially the positioning of the goods/services,
Competitors classification
Dictionary / Wikipedia
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Classification based on
HSN
HSN - international practice for adopting uniform classification .
Done for common understanding of products across countries
HSN - multi purpose 8 digit product coding system for classifying goods
HSN - good guide for confirming understanding - in doubt.
SC in CCE v. Wood Craft Products Ltd. 1995 (77) E.L.T. 23 – HSN can be
resorted in case of ambiguity
SC in Phil Corporation Ltd 2008 (223) ELT 9 (SC) - HSN a safe guide for
classification.
Rules of Interpretation
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Interpretative rules - for classification in HSN - General
Interpretative Rules.
CETA provides a similar set of six rules - instrument for
classification.
Used to determine applicable tax rate & coverage in exemption.
Order - Rule 1 and if it is not possible, recourse is taken to rule 2,
3 and 4 in that same order in which the rules are set out.
Rule 1
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Sections, chapters and sub-chapters
• Titles of sections, chapters and sub- chapters - ease of reference.
• Classification - on relevant section and chapter notes contained
in tariff.
•When Chapter does not contain any guide to classify particular
product - rule 2, 3, 4 & 5 have to be resorted
Example
• The heading of Chapter 84 refer to nuclear reactors, machinery etc
but even a hand pump falls under chapter 84.
Case Law
• Salora International Ltd Vs CCE 2012 (284) E.L.T. 3 (S.C.) -
• Tariff entries along with relevant Section and Chapter Notes, have to be
resorted to first to see whether clear picture emerges. Only in absence
of such a picture emerging, Interpretative Rules can be resorted to.
Rule 2
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Rule 2(a)
• Incomplete or unfinished goods – if such goods has essential character of
complete or finished goods - classified in same heading as that of complete
goods.
• Complete or finished goods would covers - unassembled or disassembled
form.
Example
• Cycle removed in CKD condition is a ‘cycle’ or railway coaches removed
without seats would still be railway coaches.
Rule 2(b)
• Any reference in a heading to a substance - include mixtures or
combinations of that material with other materials. Rule 3 – where
goods consists of more than one material or substance.
Rule 3
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a
• Adopt specific description (not general description)
• Ex. Steering wheel of a car is part of motor vehicle as it is more specific -
India Ltd. v. CC, 1994 (74) E.L.T. 003 (S.C).
b
•Refer to part only of the materials or substances contained in mixed or
composite goods when 2 or more headings
•Headings are to be regarded as equally specific in relation to those goods
c
•Mixtures, composite goods consisting of different materials
• classified as if they consist of that material or part which gives them their
essential character
• Eg: Concrete mix is made under articles of stone, plaster, it mainly consists of
cement
Following shall be done sequentially
Rule 3(Contd..)
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d
• Issue of essential character of subject matter in question as given in
rule
• resorted to only if identification
• providing for preference to more specific heading, is impossible
• Case Law: CCE Vs. JOCIL Ltd 2011 (263) E.L.T. 9 (S.C.)
e
•Goods cannot be classified in above cases
• Classified under heading- which occurs last in the numerical order
among those which equally merit consideration.
Following shall be done sequentially
Rule 4 & 5
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Rule 4 – Akin rule
Goods cannot be classified in above principles -
classified under head appropriate to goods - most akin
Rule 5
Packing material - specially designed/fitted to contain a specific
article + given with article for which they are intended-
classification of items which are packed
NA- packing material itself gives essential character as whole
Eg- camera cases, mobile cases.
Rule 5
Packing materials & containers cleared / presented along with goods -
classifiable with goods
NA when such packing material are intended for its repetitive use.
Ex: Glass bottles meant for repetitive use & cannot be classified along
with soft drink
Rule 6
While ascertaining the classification of goods in sub-heading of a heading
- according to the terms of those sub-headings and any related Sub-heading
notes and, mutatis mutandis
Above principles of classification - only sub-headings at the same level
are comparable.
The relative Chapter and Section Notes apply, unless the context
otherwise requires a different interpretation
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Other rules for Interpretation • Technology or complex chemical/ pharmaceutical
products - reliance of the standard specified reference
books can be done
• For common products this may not be relevant.
Classification as per ISI/ Pharmacopeia etc
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Non-statutory Principles evolved out of Judicial decisions
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Other rules for Interpretation
(Contd..)
Trade Parlance Theory
Used when
the words are not defined under Act
words are not used in scientific or technical sense in tariff
The terms in Tariff heading or sub-heading using commercial words to be
interpreted as per trade understanding
In case of usage of strictly technical or scientific words, the approach
should be different
Case Law - Chemical and Fibers of India Ltd. v UOI [1997 (89) ELT
633 (SC)]
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Other rules for Interpretation
(Contd..)
• used when definition in statute is absent & articles are identified with
their utility, primary use, design, shape etc
Function or use
Break up or constituent material
Expert opinion
Dictionary meaning
Decided case laws of High Courts and Supreme Court and advance rulings
Other factors for
determining classification
of goods
•Raw materials classifications and rates
•Doubt on applicability of lower vs higher tax rate- advisable to pay at higher
tax rate especially when the tax paid on inputs/raw materials is high leading
to credit accumulation.
• Credit - used to pay the output tax at higher rate
• Customer usage and credit whether available
• New technology products - require understanding technological
advances
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Services, classification could involve the following
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Terms of agreementClassification of
independent service
Bifurcation of combined service
Essential character
Care to be taken while classifying goods and services & claiming
exemptions
Entry - read in plain and simple terms. No assumptions &
presumptions.
The coverage of entry – Nothing read in or nothing read out.
Client claims concessional rate of tax/exemption - professional to have
skeptical view. Conclude by following principles as set out above.
Benefits under exemption notification – conditions strictly complied
with and met.
Exemption Notification - read literally & then construed liberally if
found that notification is applicable to assessee.
More than one exemption - assessee can opt more beneficial one or
both
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Exclusions In GST
Different from exclusions from levy
- From coverage itself like 5 petroleum products, electricity, liquor.
– Money & securities
Exclusion from supply - Sch III of CGST
Employee to Employer
Court/ Tribunal, MP etc.
Funeral, burial..
Land, Completed building
Actionable claim other than lottery, betting, gambling
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Threshold Exemption
Rs. 20 lakhs / 10 Lakhs – No Interstate, No RCM, working thru E-com, agents, online database services from outside India.
Sec- 2 (6) Aggregate Turnover : Goods + Services Supplied + stock transfer + related parties transaction+ supplies to SEZ & EOU/ Exports + Exempt supply
Sec - 2(47) – Goods or services at Nil rate & Non taxable supplies
Sec 2(78) – Not leviable under Acts.
Whether URS provision under Section 9(3) or 9 (4) would limit this exemption?
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Supplier who set-up new concern by splitting existing Co/ set up multiple Co with financial, managerial, production & mkting
dependency – considered as one entity??
Exemption Claim-
Guiding Principles
No intention to be read into ( no baggage) - strictly applied
Normal ordinary meaning
Expressions used in earlier statutes not interpretable for latter ( ST Vs GST) if defined in GST
Certificate issued by Statutory body is binding
Minor procedural lapses not to lead to denial
By way of has less coverage than in relation to
Simultaneous availment of exemptions
Circulars, press notes, trade notices ONLY in line ( beneficial maybe)
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Action Point in case of any
doubt / unworkability
Read carefully- fresh Vs dried Vs chilled Vs frozen, unit container, seed quality, registered brand name- Common brand name- Withdrawal of registration
Representation in case of unintended hardships/ defying our logic
Advance Ruling
Writ in court
Disclosure to revenue
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Indirect Taxes Committee has been proactively supporting the govt. in creating awareness and undertaking the knowledge overhaul exercises pertaining to GST, some important initiatives on GST are:
Publications on GST
Study Paper on Taxation of E-Commerce under GST – August2017
Booklet on How to get GST Registration- July 2017
Bare Law on GST Act(s) and Rule(s) – July 2017
BGM on GST Act(s) & Rule(s) – May 2017
FAQs & MCQs on GST – May 2017
Simplified GST Guide for Manufacturer – February 2017
Study Paper on Unjust Enrichment - February 2017
E-Newsletter on GST Launched since April 2017 – 6 editionsreleased till date.
E-learning course on GST
Suggestions on GST Act & Rules submitted – July, 2017
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Indirect Taxes Committee immediate future plans:
Keep representing for making GST simple, fair and transparent
Training Program for Govt. Ministry, CBIC including NACEN on GST etc.
Webcast on various technical and procedural aspects to enable smoothimplementation of GST
Update of all existing publications relevant to GST post introduction of GST
New Publications like GST Transitional Advisory, Simplified GST guide forService Providers & Traders, Research Papers, Sectoral booklets on GST.
More 1/2/3/4 Day Workshops / Prog. on GST/ Indirect Taxes/ Customs &FTP/ Litigation Mgt etc. All with standardised Free Course Material
100 short Videos Lectures on Concept of GST Law
Faculty Identification Programme
Other initiatives like interactive knowledge forums, Assisting StateGovernments in training under GST Law, Regular representations, Budgetsubmissions, members interaction etc.
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