Date : 25th January, 2018
Rate and value are two most critical parameters to determine tax liability
The indirect tax payable on goods is quantified by applying a tax rate on the transaction value of goods assessed. Except in case of a specific rate i.e. tax payable is a specific amount for a unit of measure i.e. numbers, weight, volume or area. In all other cases, the tax rate and value are the most critical parameters to determine the correct tax liability.
Ideally any GST should have fewer tax rates not seven different rates
In Singapore, Japan or Australia for instance, a single GST rate applies to all goods & services. This is 7%, 8% and 10% respectively. So, in Singapore, whether the item is a fountain pen, a 65” colour TV, or a cup of coffee in Starbucks, the GST rate is a standard 7% on these items. A standard rate eliminates classification disputes eliminating the need for an elaborate tariffs to classify goods or services.
A single rate across all items is not be possible in India. Financial inequality makes it necessary to differentiate and apply different tax rates for different types of goods. For instance, goods meant for mass consumption, luxury goods, goods injurious to health and other goods must attract different tax rates. In such a multiple-rate situation, accurate classification is mandatory to avoid disputes.
The multiple indirect tax rates on goods were reduced over decades to 12.5%
Indian indirect tax laws at both the Central and State levels were continuously rationalised to minimize classification disputes. Innumerable tax rates tended to tax disputes on classification. This problem was addressed and number of tax rates minimised over the decades.
Tariff & tariff schedules provided the legal substrate for accurate classification
Also, tariffs and tariff schedules were made a part of the tax legislations to provide legal authority to classification. Till 1986, the Central Excise and Salt Act contained the First Schedule listing items from 1 to 68. In January 1986 the Central Excise Tariff Act [aligned with the global Harmonized System of Nomenclature (HSN)] became operative.
The First Schedule to the Central Excise Tariff Act 1985 reflected the HSN. This included the descriptions, notes in each Section, Chapter, Heading and Sub-heading and corresponding duty rates. The General Rules of Interpretation and Explanatory Notes to the Central Excise Tariff Act also reflected the HSN.
In short, these became the legislative substrate for accurately classifying goods. Similarly, the respective sales tax and subsequent VAT laws set out Tariff Schedules to determine the tax rate applicable for different items.
In addition, notifications were issued exempting goods, manufacturers, dealers, specific end-uses etc. either fully or partially from tax. These notifications together with the Tariffs determined the effective rate applicable on any transaction.
GST on goods is a move away from a smaller number of tax rates to seven different tax rates
Another significant point is that just before implementing GST on 1st July 2017, most goods attracted 12.5% central excise duty rate and similarly the VAT rate applicable on most goods was 12.5% or 5%. This meant minimum scope for classification disputes.
After GST, the scene has completely transformed. GST brings several schedules with different GST rates for goods. The combined CGST + SGST rates in these schedules are 0%, 0.25%, 3%, 5%, 12%, 18% and 28%. It’s not unusual to find that goods which were hitherto under the same tax bracket are in GST spread over 12%, 18% and even 28%.
Increased number of tax rates needs more robust legislation for accurate classification
As stated above increased number of tax rates creates more scope for classification disputes. Naturally, one would expect the GST law would be made correspondingly robust to prevent such disputes. This is not so. On the contrary none of the GST legislations (CGST, SGST, IGST, UTGST) seem to include any tariff or tariff schedule, Section or Chapter Notes, General Rules of Interpretation or Explanatory Notes as a part of these enactments.
Currently only notifications are the legal basis to determine GST rates – No tariffs or tariff schedules
The only legislation currently available to determine GST rates are notifications (subordinate legislations) issued from time to time. For example, the central tax rates applicable to different goods was set out by Notification 1/2017 Central Rate dated 28th June 2017. This notification prescribes different GST rates for items included in different schedules.
Also Table to the notifications lists out the Chapter headings comprising of 4 digits (presumably from the HSN) and the corresponding description of each Chapter heading. This apparently is the only legal authority to determine the GST rates applicable to goods. Though it is generally understood that GST classification is based on HSN, there is no legal authority to link HSN with GST.
There is no Tariff or Tariff Schedule with legal authority to rely upon. Although there is a Explanation at the end of the Notification which makes applicable the “rules of interpretation” to the Customs Tariff Act, 1975 including the Section, Chapter Notes and the general explanatory notes to the First Schedule, it still falls very short of a globally evolving HSN with no legal authority to refer to the Explanatory Notes to the HSN which is sometimes crucial to determine classification of goods.
The relevant portion of the Explanation to the Notification reads as under :
"(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."
How this came to be?
In the CBEC FAQ dated 31.3.2017, the classification of goods under GST has been covered in Question No 20. It reads as under :
“Q 20. How will the goods and services be classified under GST regime?
Ans. HSN (Harmonised System of Nomenclature) code shall be used for classifying the goods under the GST regime.
Taxpayers whose turnover is above Rs. 1.5 crores but below Rs. 5 crores shall use 2-digit code and the taxpayers whose turnover is Rs. 5 crores and above shall use 4-digit code. Taxpayers whose turnover is below Rs. 1.5 crores are not required to mention HSN Code in their invoices.”
Thus the applicability of the HSN Codes can be summarised as under:
⦁ If turnover is less than Rs 1.5 Crores no need to follow HSN
⦁ If turnover exceeds Rs 1.5 Crores but less than Rs 5 Crores ONLY 2 digit HSN codes (Chapter level details) required
⦁ If turnover exceeds Rs 5 Crores ONLY 4 digit HSN codes (Chapter Heading level details) required
Decision regarding classification in the 14th GST Council meeting on 18th May, 2017
Similarly in the 14th Meeting of the GST Council on 18th May, 2017 this point was discussed and appears at Point No 29.1 of the minutes of the said meeting. It reads :
“29.1. The Secretary drew attention to paragraph 6 of the agenda notes to agenda item 9 in Volume-3 and stated that GST rates would generally be prescribed at the 4-digit HS Classification, unless a carve out was required to specify the rate for a good at 6 or 8-digit levels. He proposed that for GST purposes, the classification of goods and the Rules for Interpretation thereof as given in the First Schedule to the customs Tariff Act, 1975 be relied upon.
The Council agreed to this proposal.” (emphasis supplied)
Decision in the GST Council doesn’t seem to be converted into GST law
Though this transpired in the GST Council on 18th May, 2017, the proposal to adopt the First Schedule of the Customs Tariff Act, 1975 for classification of goods and rules of interpretation under GST has not been converted into law. Currently, the notifications prescribing GST rates at 4-digit level are the only law under GST to classify and determine GST rates.
Perhaps this was caused by a need to implement GST quickly and keep the GST law simple keeping in mind small tax payers.
Budget speeches, trade notices FAQs have only persuasive value if there is ambiguity
It is well established that public notices, FAQs, budget speech etc. cannot alter the legal position carved out by Acts, Rules and Notifications. These documents may have persuasive value and could be relied upon only if there is ambiguity or doubt. Conversely, if the descriptions in the notification is clear and unambiguous, there is no need to refer to any external aid to interpret. The notification alone will determine the classification and GST rate applicable.
Absence of Tariff with legal authority could lead to classification related litigation
The absence of a Tariff with legal authority seems to be a lacuna in newly implemented GST. It could lead to classification disputes and litigation.
Under GST, tax payers are therefore faced with a combined impact of multiple tax rates for goods and also the absence of legislative authority for proper interpretation and classification. If a single GST rate was applicable on all goods, there would be no difficulty.
Either the Tariff should be legislated or the number of tax rates reduced to avoid litigation
The Government of India appears to be apprised of this situation and distinct steps have been taken to lower tax rates on a large number of items on three occasions since implementation. However, these changes have not reduced the number of GST slabs. Either the GST law must be amended to insert HSN and its interpretative tools to smoothen classification or the number of GST rates reduced to just three slabs.
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