AAR ruling on higher GST on frozen parotta triggers debate

The decisions of the Authority for Advance Rulings (AAR) on GST can range from the controversial (Rajasthan AAR on Directors’ remuneration) to the ordinary (on anti-profiteering). A recent decision of the Karnataka AAR hits a person where it hurts the most — his stomach.

In the case of ID Fresh Foods, the AAR ruled that frozen parotta would attract 18 per cent GST and not 5 per cent since it does not meet the definition of roti or khakra . Social media was abuzz with jokes about the decision. A government official even went to the extent of defending the decision and stated that the poor do not eat frozen parotta.

HSN Codes

The crux of the problem lies in the Harmonised System of Nomenclature (HSN) Codes that we decided to needlessly bring into the GST law from the erstwhile laws. It is understandable to have a laundry list of HSN Codes for Customs laws but not for a largely domestic law such as GST. The problem lies in the fact that this laundry list is extremely lengthy, has innumerable Chapters and sub-headings within Chapters — it almost looks like a work of modern art with a title.

Due to this, ready-made garments and ready-made sarees can have two different codes and rates and we can have complicated entries such as oil-cake and other solid residues, whether or not ground or in the form of pellets, resulting from the extraction of vegetable fats or oils, other than those of Heading 2304 or 2305 (this falls under Heading 2306).

In the case of ID Foods, the controversy was whether parottas would fall under Heading 1906: “Bread, pastry, cakes, biscuits and other bakers’ wares, whether or not containing cocoa; communion wafers, empty cachets of a kind suitable for pharmaceutical use, sealing wafers, rice paper and similar products.” Or under Heading 2106 that covers “preparations for use, either directly or after processing (such as cooking, dissolving or boiling in water, milk, etc.), for human consumption, provided that they are not covered by any other Heading of the Nomenclature.”

ID contended that the product merits classification under Chapter heading 1905, under the product description of ‘khakhra, plain chapatti or roti” quoting Notification No. 1/2017-Central Tax (Rate) as amended by Notification No.34/2017-Central Tax (Rate). Notification No 34 inserted a new entry No 99A with the description “khakhra, plain chapatti or roti”, without defining the said description.

The AAR was of the opinion that 2106 suited frozen parottas better since it is not khakra, plain chapatti or roti.

Staple food

Though it is not within the purview of the AAR, no one questioned why the persons who drafted the HSN Codes did not think of including a staple Indian food such a parotta in the Code but could think of a not-so-common item such as khakra. Did they intend parotta when they meant plain roti? Can parottas be included under “ similar items” mentioned in HSN Code 1906? Should plain parottas also be taxed at 18 per cent?

The CBIC (Central Board of Indirect Taxes and Customs) may not want to make an effort to simplify the HSN Code merely due to the number of entries therein. It can make a beginning though by restricting the HSN Code only to the Chapter headings. Next, it can attempt a rationalisation of the Chapter Headings. In the case of parottas, ‘Ready to eat foods’ can be one Chapter Heading instead of having different codes for different types of parottas.

We can only hope another AAR does not rule that the variety of parotta called Ceylon Parotta has to suffer both Customs duty and IGST because it has a foreign name. They may also be asked the question: What would be the GST rate if ID Foods puts Indian Bread on the outside of the packet and two frozen parottas inside?

The writer is a chartered accountant