GST on Gangajal: Here's what experts have to say on complex GST classification structure

The recent controversy around the taxation of 'gangajal' under GST might have irked political parties and seemed to have actually put Finance Ministry on the back-foot as it claimed the commodity is under exempted list, but if one gives a close look, the item is not even mentioned under the 10 commodities notified by CBIC as 'Pooja samagri'.

Tax practitioners call it another example of issues arising out of complex classification structure of GST just like many other such contradictions of treatment of related or similar commodities.

Gangajal is treated as packaged water by many sellers where they are charging 18% GST as it doesn’t feature under the 10 items mentioned and notified by the central board of indirect taxes and customs (CBIC) as agreed upon in the GST council. However, in some cases, a few taxpayers just deemed it to be under the exempt list and do not charge GST, but have been filing returns based on the understanding.

Well, the answer is no.

In the past many such examples have come before the industry, taxpayers and tax administrators where such confusions have lead to a lot of complexities in terms of treatment and charging of GST. Not just this, at times, the matter has reached courts and then corrected also by the GST Council.

Sample this, under GST, drinking water packed in 20-litre bottles are liable to 12% tax and waters, including natural or artificial mineral waters and aerated water, not containing added sugar or other sweetening matter are taxed at 18%.

Similarly, roti attracts 5% GST but a Paratha/ Parotta attracts 18% GST. Raw meat is charged at 5% GST but prepared meat is at 12%. Popcorn is puff corn and charged at 18% but Namkeen is at 12%.

Likewise, Are mosquito repellants medicaments? Mosquito repellant attracts 18 % GST but Medicaments attract 12%. The matter became so intricate that a company sought to get the lower rate by seeking to classify it as a medicament. The matter was heard by Authority for Advance rulings (AAR) and it was held otherwise and classified it as a repellant attracting 18 % GST.

Experts say, the examples might be laughable at times, but its time that GST authorities should take a serious review and come with revised rate list to avoid such controversies, litigation and give a breather to the GST taxpayer.

Pratik jain Partner at PWC said, "Classification under GST is a difficult exercise, not only in India, but across the globe.  In countries like India, where there are multiple rate slabs and exemptions, the issues are even more complex.  The GST council should perhaps again initiate the process of rate rationalization to reduce the number of slabs and exemptions to minimize these issues."

Saurabh Agarwal, Tax Partner, EY too said, "Currently, the government is very active in providing timely clarification on the complex classification issues in order to reduce confusion and ensure a smooth implementation of the tax regime. Uncertainty in classification can lead to disputes and impact businesses and consumers. The recent tweet clarification provided by CBIC regarding the classification of Gangajal under the category of puja samagiri is a step in the right direction. It offers transparency and helps businesses and individuals understand their tax liabilities."

However, Agarwal said, "It's not just the issue of Gangajal that requires attention. There are numerous other classification issues that need to be addressed. For instance, determining whether flavored milk should be classified as milk (at 5%) or as a beverage (at 12%) can significantly affect businesses operating in the dairy industry. Similarly, deciding whether samosas belong to the category of namkeen (5%) or should be placed under the residual entry (18%) is essential for clarity in the food industry. Issues like whether parathas should be classified as roti and attract a lower GST rate or fall under the residual entry, and whether pizza toppings should be considered as cheese and attract a lower GST rate are also critical for businesses and consumers alike."

Agarwal added, "To alleviate confusion and provide much-needed clarity, it's suggested government should compile a list of these classification issues and issue comprehensive and definitive clarifications. This would not only help the industry but also have a positive impact on tax compliance and revenue collection. Clear, well-communicated policies will ultimately benefit both businesses and the common man, ensuring the GST system operates efficiently and effectively."

MS Mani, tax Partner at Deloitte too feels that while classification issues in GST have come down over the past few years, there are quite a few specific products which are not explicitly defined leading to challenges in determining rates . "The issue is more pronounced in case of products which are mentioned in exemption notifications as the law requires such notifications to be strictly interpreted. Since GST is a transaction tax applied on specific products, as more new products emerge, there should be a mechanism to clarify on the applicable rates on an ongoing basis, although it may be difficult to do so on a real time basis,” he said.

According to Najib Shah, Former Chairman of CBIC, “The GST tariff is largely based on the Customs Tariff which is based on the internationally accepted Harmonized Commodity Description & Coding System generally referred to as Harmonized System or HS. This is a standardized numerical method of classifying products arranged in a logical structure and supported by well-defined rules to ensure uniformity in classification. The Indian Customs tariff consists of 21 sections and 98 chapters with goods being classified up to 8 digits.

GST presently has 4 broad slabs-5,12,18 & 28; this is aside from the 0 rate and special rates  on cut & polished stones and gold . As long as there are multiplicity of rates there are bound to be classification disputes- the temptation being to classify the product such that it attracts a lesser rate of duty. The solution lies in convergence of rates so that classification becomes irrelevant. The process will take time and GST is slowly but surely moving in that direction."

"The issue regarding classification under GST will continue as long as there are multiple rates and exemptions. What is need of the hour is to bring clarity in rates of similarly placed goods either based on grouping under HSN or consumption . GST Council in the past has pro actively clarified such issues . One example is coconut oil sold in small container should be treated as essential oil or hair care product . GST Council held it to be oil not withstanding the fact that it could be used as hair care product," said DP Nagendra Kumar, Former Member CBIC and senior advisor at Deloitte.