Rationalising HSN codes

Classification of food products and their taxation have always thrown up interesting discussions in indirect taxes. Service tax laws had concepts such as indoor and outdoor catering and a wholesome meal.

The introduction of GST has seen differences of opinion on the rate of tax on an eclectic variety of food products ranging such as papad, fryums, parathas and more recently, cheese balls.

Different opinions arise because all products are classified under the Harmonised System of Nomenclature (HSN) — a long list that contains Codes and sub-codes for more than 5,000 products.

Since food products would invariably contain different items that have different rates of tax as per the Code, the question arises as to which Code would be the most appropriate one. Classification disputes arise because the Tax Department would choose to tax the item at the highest rate while the tax payer would want to classify the product as per the principal component of the food product.

HSN Codes

HSN, was conceived and developed by the World Customs Organization (WCO) with an aim of classifying goods from all over the world in a systematic and logical manner.

It is a six-digit uniform code that classifies more than 5,000 products and is accepted worldwide. These set of defined rules are used for taxation purposes in identifying the rate of tax applicable to a product in a country.

It is also used to determine the quantum of product exported or imported.

It is a crucial feature to analyse the movement of goods across the World. It is a combination of different sections, further drilled down to chapters, which are further classified into headings and sub-headings.

The resultant figure is the six-digit code. HSN is adopted in more than 200 countries, covering a staggering 98 per cent of goods in the world. India has already been using HSN system since 1986 in the Central Excise and Customs regime.

The HSN structure contains 21 sections, with 99 Chapters, about 1,244 headings, and 5,224 sub-headings. With such a vast amount of data, there is bound to be litigation.

Rate wrangle

That HSN Codes are needed for import and export is understandable. But whether the same codes should be used for GST for domestic transactions needs a relook. Tender coconut water is classified under HSN Code 2202 90 90. If the tender coconut water is put up in a unit container and bears a registered brand name, it is taxable at 12 per cent. If not, it is exempted.

The Appellate Authority for Advance Rulings (AAAR), Uttar Pradesh recently ruled that cheese balls are to be classified under Heading 0406 and taxed at 12 per cent instead of Heading 2106 at 18 per cent.

Like HSN Codes for goods, we have the Service Authorisation Code (SAC) for services. There is not much litigation on SAC codes since most services fall into the 18 per cent bracket.

The GST Council is due to meet early next year to discuss rationalisation of rates.

They should also commence the task of rationalising the HSN Codes for the purposes of GST while retaining them for the purpose of import and export. Since most of the litigation arises for the sub-headings under each Chapter of the Code, they could look at limiting the Codes to only the Chapter headings. Items that are appearing in the sub-headings should be morphed with the Chapter headings.

This is easier said than done, but there are enough decisions from both the erstwhile and present tax regimes that could serve as a guidance. GST notices are being sent to taxpayers all over the country thick and fast. With only incremental changes being made to GST laws, CBIC should focus on limiting litigation for which both infrastructure and bandwidth are in short supply now.

The writer is a chartered accountant