While the goods and services tax (GST) system classifies food items based on the harmonised system of nomenclature (HSN) codes, various disputes have arisen on the exact placement of these products for determining the tax rates applicable to them.

Cheese balls, the latest item to enter this dispute, became the bone of contention between a company and the tax authorities. The dispute has been settled for now by the appellate authority for advance ruling in Uttar Pradesh.

While the GST authorities and the Authority for Advance Ruling (AAR) in Uttar Pradesh kept the tax rate under 18 per cent because cheese balls did not fall under any of the specified food items, the petitioner, Savencia Fromage & Dairy Pvt Ltd, argued for its inclusion under cheese, which attracts a rate of 12 per cent.

The company intended to make cheese balls from bread. It argued that the presence of items other than cheese in the balls did not affect their classification as cheese, provided that the goods retain the character of cheese.

After losing its case in the AAR, the company approached the Appellate Authority for Advance Ruling (AAAR) in the state and argued that cheese is the most important ingredient in its product, accounting for 55 per cent of the total volume. It argued that the product cannot be made without cheese.

Savencia Fromage said the batter and bread coating are not essential and can be easily substituted. It is only cheese that differentiates the impugned goods from any other breaded product.

The AAAR agreed with the company’s argument and set aside the AAR order of 18 per cent GST on the food item.

Cheese balls aren't the only product to have triggered a row between companies and tax authorities. Earlier, the authority of advance ruling (AAR), Karnataka ruled that eggs are agricultural produce and transporting them from one place to another would not draw any GST. This was despite the tax authorities arguing for its taxability.

The ruling was pronounced on an application submitted by SAS Cargo, which is engaged in the business of transporting eggs and hatcheries by rail.

The AAR sought to know the government's position from the office of the commissioner of central tax, Bengaluru South GST Commissionerate.

The assistant commissioner replied that according to the GST laws, agricultural produce is any produce out of cultivation of plants and rearing of all forms of animals, except the rearing of horses, on which either no processing is done, or if done, does not alter the essential characteristics of the produce.

However, production of eggs appears to be a commercial enterprise, not an agricultural activity, the assistant commissioner said. The office was of the view that GST laws and clarifications given under them are intended to give relief to farmers who, in addition to cultivation, may take certain agro-based activities such as animal husbandry, pisciculture and sericulture.

The office was of the view that eggs fall beyond the scope of agricultural produce, according to the intention of the GST laws and explanations.

However, AAR ruled that eggs on which no further processing is done are covered under the definition of agricultural produce, according to the classification made by the Central Board of Indirect Taxes and Customs (CBIC). It also ruled that services for transporting eggs are exempt from GST.

In another case, AAAR of Gujarat held that papad fryums would not attract any GST as they are similar to traditional round papads in all respects.

In this connection, the appellate authority modified the ruling of AAR which had held that Fryums would attract 18 per cent GST.

The AAAR held that Fryums is a brand and not the generic name of the product.

Entry number 96 of the notification issued on June 28, 2017 by the CBIC mentions papad, which attracts zero GST rate. However, the term papad has not been defined in the GST Acts, the AAAR emphasized.

The Appellate Authority resorted to the common sense and meaning of traditional parlance to explain that a papad is a thin Indian wafer that is served either as an accompaniment to an Indian meal or as a snack. It noted that the description of the product is “papad by whatever name is called”.

In that sense, Fryums do not change the basic character of the product and they remain papad, it ruled.

Earlier, the Gujarat AAR's ruling that Fryums would attract 18 per cent GST had stirred a controversy. Some people suggested that GST will be imposed on papad depending on its shape. One person had tweeted that a round papad is exempt from GST and a square one attracts the tax. The CBIC had to issue a clarification to settle the matter. It tweeted that GST does not distinguish papad based on shape.

"Papad, by whatever name known, is exempt from GST," CBIC had tweeted.

Then there are various other disputes relating to parathas, flavored milk, Appy Fizz, rava idli mix, and other items.

As cited above, the classification of food items for the purpose of GST rates was done on the basis of HSN codes. The codes contain 21 sections. These are divided into 99 chapters, which together have 1,244 headings. This system helps in making GST simpler and globally accepted. Eight-digit HSN codes for goods are universal. Common HSN codes apply to Customs and GST. Codes prescribed in the Customs tariff are used for GST purposes. In Customs Tariff, the HSN code is prescribed as chapter (the first two digits), heading (4 digits), subheading (6-digit harmonised code) and tariff items (8 digits).

There is a suggestion by some that the first two digits of the HSN codes be used to sort out disputes. However, Harpreet Singh, partner, indirect tax at KPMG in India, said, "The suggestion by a few of adopting only the first two digits of HSN classification (chapter heading) for food products may reduce some disputes, but may not address the whole issue as most disputes are being debated at the chapter head level.”

One expert said on the condition of anonymity that a two-digit classification will not help because the intention is to classify products on the basis of complete HSN. "The moment you go for two digits, what we are saying is there would be a broad classification, as in, say, metals. So, copper, tin, brass, aluminum, gold, silver are all metals. That is not the intention. Copper cannot be taxed at the same rate as many other metal because it is used in electrical cables which is a national priority," this expert said.

Singh suggested that the lower slabs for food items or, in fact, a single rate for them would help reduce the disputes.

"Lower tax slabs or one GST rate on all food products, irrespective of its ingredients, value, consumption etc. seems to be the only way disputes can be minimised,” added Singh.

Under the GST system, a food product is liable to tax only if it is a registered brand. However, in this respect too, many court cases are on. These disputes arise in two situations--when the brand isn't registered and when the entity concerned forgoes its rights over the brand.

Abhishek Rastogi, partner at Khaitan & Co, who is arguing in a case about this issue in the Bombay High Court, said exemption is provided for goods other than the registered brand name and this leads to disputes in various cases where the brand name is not registered.

He said another factual dispute remains in a situation when an enforceable right in respect of a brand name has been foregone voluntarily. The exemption notification provides for relief in such cases, but this condition is generally under dispute by the tax authorities, he said.

M S Mani, partner at Deloitte India, said while there is a clear need to avoid classification disputes, it must be remembered that new products and services will keep emerging with rapid technological advancements and it will be difficult to keep pace with their classification from the GST perspective.

Another expert said on the condition of anonymity that the problem arises as more and more products get introduced in the market, which were not in existence when GST classification on the basis of HSN codes was made. As mew products evolve, classification has to catch up with them and there is a time lag in doing so.

To cite an example, he said when GST classification of HSN codes was made, rotis were made round. However, ID Fresh Food of Bengaluru came out with paratha with square ones. "How can HSN handle it," he wondered.