Mr. Ratan Kumar Samal (Advocate) CLASSIFICATION AND VALUATION OF GOODS & SERVICES WITH RELEVANT ADVANCE RULINGS INTRODUCTION India, w.e.f. 1 st July, 2017, switched to GST which is the single biggest tax reform undertaken by the country since the last 70 years of independence. GST is a multi-stage destination-based tax which will be collected at every stage of supply of goods or services or both. The credit of taxes paid at the previous stages will be available for set- off at the next stage of supply. GST is applicable on the taxable supply of goods and services or both on the value determined as per the provisions and at such rates as may be notified by the Government on recommendation of the GST Council. The GST Council has fixed four broad tax slabs, i.e., 5%, 12%, 18% and 28%. On the top of the highest slab, there is a cess on luxurious and demerit goods to compensate the States for revenue loss in the first five years of GST implementation. Most of the goods and services have been listed in four slabs but goods like gold and rough diamond have exclusive tax rates. Some goods have also been exempted from taxation. The essential items have been kept in the lowest tax bracket whereas; luxury goods and tobacco products are subject matter of higher tax rates. OBJECTS AND PURPOSES Incorrect nomenclature and ambiguities in the product description are the greatest challenges faced globally. Incorrect or misleading classification of commodities and services brings a lot of problems and risks to the businessman, as well as to the exchequer. It also leads to multiplicity in litigation which affects the economy and also affects both the parties to the litigation. The Comptroller and Auditor General of India, in Report No. 12 of 2014 has stated that Director of Revenue Intelligence of India had dictated 298 duty evasion cases involving misdeclaration of goods to the tune of Rs. 23.92 crores in the Financial Year 2013 itself (Sourced from Thomson Reuters’ blog). In intricate business domains, classification of commodities are a major challenge to the industries as well as to the authorities. New business ventures need a proper understanding of classification of goods and services, i.e., when a new product is launched or a new service is provided. 1
Misclassification of goods and services may lead to several adverse consequences. To be specific, few of them are as under: 1. Lesser charging of rate of tax will come under limelight, either at the time of Audit or at the time of assessment; or under the action of enforcing agencies which would consequently lead to erosion of profits on account of higher levy of tax rate, interest and penalty at a later stage. Since GST is an indirect tax and is ultimately collected, it will hit the pockets of the suppliers. Even the customers will not pay for the same. 2. If higher rate of tax is charged than the applicable lower rate, there is a higher risk of getting refund from the exchequer since it is collected from the customers and further, there is loss of business since the other suppliers may be charging a lower rate. 3. Incorrect classification will lead to a great impact in the chain of ITC (Input Tax Credit) claim. It has a serious impact in other tax legislations like Income Tax, i.e. if, on account of misclassification, a higher tax is discharged along with interest and penalty, then you may not get the benefit of deduction under the Income Tax Act, 1961. 4. Earlier, under Central Excise, which was single point tax collection on the manufacture of goods, any misclassification had an impact on the manufacturer collecting the tax and had no direct bearing on the product sold on the distributor or the retailer. But under the GST, which is multiple tax collection at each and every stage and ITC is claimed on the corresponding purchases, any misclassification will disturb the entire chain of transaction. RELATED PROVISIONS UNDER THE LAW WITH ANALYSIS 1. As per Section 9 of the CGST Act, 2017 and the SGST Act, 2017, tax shall be levied on intra state supply of goods and services or both at such rate as may be recommended by the Council. The GST Council Ministry of Finance, Government of India, Revenue Department vide Notification No. 1/2017 dated 28/06/2017 had notified the rates of the Central Tax at 2.5%, 6%, 9%, 14%, 1.5% and 0.125% classifying all the goods under Schedule I to VI respectively. Similarly, the State Government charges at the same rates as stated above. A separate exemption schedule was notified vide Notification No. 2 of 2017 dated 28/06/2017 exempting certain supply of goods by virtue of exemption granted u/s 11(1) of CGST Act, 2017. Parallel provisions are also provided in the State laws granting such exemption. 2. The rate notifications stated above in terms of supply of goods provide an Explanation for the purpose of the notification. Note (iii) & (iv) to the said Explanation reads as under: 2
(iii)―Tariff item‖, ―sub - heading‖ ―heading‖ and ―Chapter‖ shall mean respectively a tariff item, sub-heading, heading and chapter as specified in the First Schedule to the Customs Tariff Act, 1975 (51 of 1975). (iv) The rules for the interpretation of the First Schedule to the Customs Tariff Act, 1975 (51 of 1975), including the Section and Chapter Notes and the General Explanatory Notes of the First Schedule shall, so far as may be, apply to the interpretation of this notification. 3. First Schedule to the Customs Tariff Act, 1975 provides certain principles for interpretation of the tariff entries. General rules for the interpretation of the First Schedule to the Customs Tariff Act, 1975: Classification of goods in this Schedule shall be governed by the following principles: 1. The titles of Sections, Chapters and sub-chapters are provided for ease of reference only; for legal purposes, classification shall be determined according to the terms of the headings and any relative Section or Chapter Notes and, provided such headings or Notes do not otherwise require, according to the following provisions: 2. (a) Any reference in a heading to an article shall be taken to include a reference to that article incomplete or unfinished, provided that, as presented, the incomplete or unfinished articles has the essential character of the complete or finished article. It shall also be taken to include a reference to that article complete or finished (or falling to be classified as complete or finished by virtue of this rule), presented unassembled or disassembled. (b) Any reference in a heading to a material or substance shall be taken to include a reference to mixtures or combinations of that material or substance with other materials or substances. Any reference to goods of a given material or substance shall be taken to include a reference to goods consisting wholly or partly of such material or substance. The classification of goods consisting of more than one material or substance shall be according to the principles of rule. 3. When by application of rule 2(b) or for any other reason, goods are, prima facie, classifiable under two or more headings, classification shall be effected as follows: (a) The heading which provides the most specific description shall be preferred to headings providing a more general description. However, when two or more headings each refer to part only of the materials or substances contained in mixed or composite goods or to part only of the items in a set put up for retail 3
sale, those headings are to be regarded as equally specific in relation to those goods, even if one of them gives a more complete or precise description of the goods. (b) Mixtures, composite goods consisting of different materials or made up of different components, and goods put up in sets for retail sale, which cannot be classified by reference to (a), shall be classified as if they consisted of the material or component which gives them their essential character, in so far as this criterion is applicable. (c) When goods cannot be classified by reference to (a) or (b), they shall be classified under the heading which occurs last in numerical order among those which equally merit consideration. 4. Goods which cannot be classified in accordance with the above rules shall be classified under the heading appropriate to the goods to which they are most akin. 5. In addition to the foregoing provisions, the following rules shall apply in respect of the goods referred to therein: (a) Camera cases, musical instrument cases, gun cases, drawing instrument cases, necklace cases and similar containers, specially shaped or fitted to contain a specific article or set of articles, suitable for long-term use and presented with the articles for which they are intended, shall be classified with such articles when of a kind normally sold therewith. This rule does not, however, apply to containers which give the whole its essential character; (b) Subject to the provisions of (a) above, packing materials and packing containers presented with the goods therein shall be classified with the goods if they are of a kind normally used for packing such goods. However, this provisions does not apply when such packing materials or packing containers are clearly suitable for repetitive use. 6. For legal purposes, the classification of goods in the sub-headings of a heading shall be determined according to the terms of those sub headings and any related sub headings Notes and, mutatis mutandis, to the above rules, on the understanding that only sub headings at the same level are comparable. For the purposes of this rule the relative Section and Chapter Notes also apply, unless the context otherwise requires. IMPORTANCE OF HSN: 4
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