Roti vs parotta, biscuit vs chocolate, fryum vs papad

Friday’s ruling from the Karnataka bench of AAR specifying ready-to-eat parotta as different from khakhra, chapati or roti is now expected to bring in more such classification disputes to the fore, tax experts said.

Explained | Why parota gets charged a higher GST than roti

These classification disputes date back to the pre-GST regime, with companies trying to fit in their products under lower tax slabs to keep the overall price down and, in turn, trying to maximise their own margins, given that excise duty, service tax, VAT or now GST are all indirect taxes and hence, embedded in the price of the product.

The taxman would be interested in doing just the reverse, to maximise tax gains by ensuring products are clubbed into slabs that attract bigger taxes.

Another concern that has prompted these petitions from manufacturers is that revenue authorities might raise tax demand years later, which would then involve payment of penalty, interest, and thereby an outright clarification is considered benefital.

As law leaves scope for ambiguity, many FMCG majors have been known to engage in such classification disputes with the revenue authorities. One of the celebrated cases involved KitKat. In the Nestle (India) Ltd versus the Commissioner of Central Excise, Mumbai, 1999, dispute, the ruling went in Nestle’s favour that the product was a biscuit and not a chocolate, which meant a lower tax rate burden for the manufacturer. The ruling went on to underline that “…while all chocolate must necessarily contain cocoa, it is not every cocoa product or preparation that is chocolate”.

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Marico, the manufacturer of Parachute coconut oil, has also had run-ins with state governments on whether its flagship product was a hair oil or merely coconut oil. The company pushed for the product to be bracketed in the latter category as it attracted lower duty. There has been some impetus to Marico’s argument from an unlikely source subsequently at the time of GST rollout, with the state of Kerala in GST Council meetings making a strong case for coconut oil being designated as edible oil.

In 2003, Dabur India was embroiled in a dispute with tax authorities regarding classification of Lal Dant Manjan as a tooth powder or medicinal drug. The tax authorities classified it as tooth powder.

It’s not that the classification disputes have been restricted to indirect taxes. In May 2011, an Income Tax tribunal allowed cricketer Sachin Tendulkar, who was then in the BCCI Indian cricket team, to claim deductions from his taxable income arising from earnings from appearances in advertisements.

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Tendulkar had argued that he had claimed deductions under Section 80 RR of I-T Act on the grounds that he was an ‘actor’ while appearing in advertisements. The cricketer had appealed against the verdict of chief commissioner of Income Tax (Appeals) for assessment years 2001-02 to 2004-2005, which held that he was not an actor since playing cricket was his principal profession.

The two-member tribunal, in its order on May 20, 2011, reversed this and upheld Tendulkar’s argument that he was an ‘actor’ while appearing in commercials, entitling him to deductions on payments received from sports sponsorship and advertisements during the period.

Tax experts say the lower the tax rates, the higher the possibility for companies to keep higher margins, especially in case of FMCG products. A Mumbai-based tax expert, who did not wish to be named, said the best example of this could be seen in the cut in GST rates for toothpastes from 28 per cent to 18 per cent which hasn’t translated into a commensurate reduction in prices.

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But it’s the multiplicity of rates which are seen as the biggest impediment in moving away from such classification disputes. “The wide range of tax slabs and lack of ambiguity in the law leaves scope for many such classification disputes. Companies, therefore, try to seek clarity since they are concerned about the possibility of any tax demand to be raised by revenue authorities. Such disputes had also existed in pre-GST excise duty regime, but with time, the rates were broadly aligned and led to lower number of disputes. So, similarly in GST, reduction of rate slabs might help in lowering such cases,” Abhishek Jain, Tax Partner, EY said.

The government has stated its intentions to move towards lesser number of tax slabs under GST though a uniform rate is seen unfavourable for a country like India which has wide income disparity and hence, clubbing of consumption of luxury products with essentials and necessary items do not find favour.