The Appellate Authority of Advance Ruling (AAAR) recently upheld the Gujarat Authority of Advance Ruling’s (AAR) decree that flavoured milk will not be considered as milk, but as a beverage, even though milk is a key ingredient in its preparation.

The ruling came after ice cream major Validal challenged the AAR’s ruling which ordered GST to be applied to the company’s flavoured milk after classifying it under beverages. Interestingly, while milk is exempt from tax, flavoured milk as a beverage would attract 12 per cent GST. Even more interestingly, yoghurt and flavoured lassi, both milk products, are exempted from tax.

(An ‘advance ruling’ is a decision provided by a central authority to an applicant over the supply of goods or services proposed to be undertaken, or being undertaken, by the applicant. It applies to the classification of goods/services, admissibility of input tax credit of tax, and so on. The purpose of AAR and AAAR is to minimise GST-related litigation.)

Classification conundrum

The flavoured milk issue has reignited the debate about protracted and expensive hair splitting in classification, and renewed the demand for a single rate GST. The minute differences in classifications, decided by the AAR or AAAR, which in turn affect the GST rates of products, have often pitted businesses against the government and left lawyers, chartered accountants and department officials confused.

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However, such confusions over classification-related legal disputes are not new to India. Classification of products under GST requires looking into aspects like common parlance, end-use, technical specifications, constituents of the products etc. Companies in the past have often moved the tribunal, demanding a product to be classified under a particular category.

Take the example of Dabur Odomos, which has been used as a mosquito repellent for years. But the company decided to question its classification as a mosquito repellent – which attracts 18 per cent GST – and wanted to get it classified as a medicament, which would attract just 12 per cent GST. 

The Uttar Pradesh AAR, however, dismissed the proposal while holding that as the special odour of the ointment helps in repelling mosquitoes, it would be called a repellent and not a medicament. In other words, the court ruled that the ointment cannot be considered a medicine as it is not meant for human beings, but directed at mosquito menace.

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Similarly, a Noida-based company sought a ruling on “breaded cheese”, arguing that it should attract 12 per cent GST as it is a cheese item. However, the UP AAR said that as the item is transformed into a snack whose ingredients are cheese, flour and potato, it will be categorised as a snack – which attracts 18 per cent GST.

Classification-related legal disputes are not new to India. Under the central excise law, which was subsumed under GST except for fuel, classification was often the bone of contention. According to an estimate, currently around 12,000 cases are pending before the Supreme Court that are pure classification issues under the erstwhile central excise, service tax, and VAT regime. It is a pity that the same problem continues to beset GST which, despite being touted as a ‘one-nation, one-tax’ regime, is yet to become a ‘single-rate tax’.

18%, the golden mean?

Congress leader Rahul Gandhi had pleaded for a single rate GST in the run-up to its rollout on July 1, 2017 and has reiterated the demand later. He said 18 per cent would be the golden mean and it should be written in the Constitution itself, lest successive finance ministers are tempted to tinker with it. The then Finance Minister, the late Arun Jaitley, however, demurred, saying Mercedes and slippers cannot be taxed at the same rate.

But Jaitley’s argument is flawed, as jewellery, arguably the most glaring and gleaming example of ostentation, is sold at a 3 per cent GST, much lower than 5 per cent that chappals attract.

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The EU countries with the highest standard VAT rates are Hungary (27 per cent), and Croatia, Denmark, and Sweden (all at 25 per cent). Luxembourg levies the lowest standard VAT rate at 17 per cent, followed by Malta (18 per cent), and Cyprus, Germany, and Romania (all at 19 per cent). The EU’s average standard VAT rate is 21 per cent, six percentage points higher than the minimum standard VAT rate required by EU regulation.

Rahul’s 18 per cent need not be taken at face value, but there is considerable merit in having a single rate, say 20 per cent or even 25 per cent, so that revenues forgone from the earlier mushrooming doses of taxes does not hamper governmental functioning.

Good and bad of GST 

GST has indeed subsumed at the central level, the central excise duty, additional excise duty, service tax, additional customs duty (commonly known as countervailing duty), and special additional duty of customs. At the state level, it has subsumed the state VAT/sales tax, entertainment tax (other than the tax levied by the local bodies), central sales tax (levied by the Centre and collected by the states), Octroi and entry tax, purchase tax, luxury tax, and taxes on lottery, betting and gambling. While mushrooming taxes and tax on tax (cascading effect) have mercifully gone, classification still sticks out like a sore thumb.

A varied and diverse rate regime encourages lobbying, leading to corruption in high places besides fostering legal hairsplitting. The government’s socialistic concerns should be met with a slew of direct taxes with a stiff income tax on the rich — including the capital market, which is at present let off with just a slap on the wrist — and moderate wealth tax and estate duty, as revenue supplements as well as distortion busters. Direct benefit transfers (DBT) of merit subsidies to the needy is another equaliser. But, for heaven’s sake, let GST be simple to collect and administer as it affects everyone in the supply chain. It should be ‘one-nation-one-rate-tax’.