GST & CLASSIFICATION
HSN Classification of a food product is important for determining the GST rate. GST rate impacts pricing decisions of the product and legal declarations on the package. Apart from additional tax lability, interest and penal consequences, incorrect classification can affect the entire forward supply chain with contractual disputes with customers.
The multiple GST rates and exemptions make it imperative to determine product classification before the launch of a product. Factors impacting classification of food products:
- Trade parlance
- Branding and marketing
- Flavoring agents
- Technical and dictionary meaning
- Allied laws
What’s in a name? That which we call a rose by any other name would smell as sweet. William Shakespeare, Romeo & Juliet (Act II, Scene I)
Well, in the Indian GST regime, everything lies in the name. Last year, an Indian start-up approached the Authority for Advance Rulings (AAR) in India to determine the applicable rate of tax on “Whole Wheat Parotta and Malabar Parotta” - two popular Indian breads. The applicant contended that parotta is a type of roti and was classifiable under a category of bread covering “khakhra, plain chapatti or roti” attracting a rate of 5%. The AAR rejected the contention- it ruled that it was not roti (taxed at 5%) and that it was taxable at 18% as no specific entry covered the product and in its view roti and parotta are different. This is not a one-off case and in the area of food, the complications of classification are most pronounced.
In July 2017, India moved from an erstwhile indirect tax regime covering excise, Valued Added Tax (VAT), entry tax and other local indirect taxes to a unified Goods and Services Tax (GST). Giving credit where it is due, the GST regime had several positive impacts. It allowed credit to be seamless across borders, reduced the number of taxes to be complied with, boosted logistics and brought the entire country on a single platform. In a country like India with its complex federal structure, the implementation of GST has been note-worthy. But among the various compromises that needed to be made in order to roll-out GST, one of them was that India put in place one of the most complex classification structures for its goods and services. India adopted multiple slab-based GST rates (Nil,1,3,5,12,18 and 28) for various products with highest standard rate of 28% along with compensation cess. Most countries have either a single rate or two rates structure (standard rate and concessional rate) for their GST regimes. The complex multi-rate GST structure puts pressure on Indian businesses to focus on nomenclature, branding and the technical nature of the goods and services it supplies, in order to get the right rate.
In the area of food and produce, the issue of classification is most stark. The Indian GST classification structure is based on a global system of nomenclature and classification called the Harmonised System of Nomenclature (HSN) developed by the World Customs Organisation (WCO). The HSN is a highly scientific system of classification and for most industrial products it provides clear and certain entry for classification. Even for food and produce items, the HSN provides a clear system of classification. However, Indian culinary products and innovations are not specifically covered and the Indian GST regime has added entries that are in addition and sometimes in variance to the HSN. It is here that confusion regarding classification arises.
At the same time, the changing culinary preferences of millennials have presented a huge business opportunity for innovation in the sector. Llifestyle changes in favour of packaged, canned/ frozen, ready-to-eat, ready to cook or pre-packaged food items have provided impetus for food entrepreneurs to set up shop in India. Changes can be seen across the farm to fork value chain. There has been a paradigm shift from the unorganised sector to branded food operators and chains in India. The introduction of new flavoring agents, proprietary food from fusion of cuisines, health supplements bridging the nutrition gap, and, innovations in food preservation and packing has posed a unique challenge in the taxation regime.