The move is to reduce piling tax disputes and litigation the industry faced due to ambiguity in product classification.
The board has asked the fitment committee under the GST council to undertake a comprehensive report examination of classification of goods focussing on products with similar composition but placed in different categories and under different tax rates. The committee is expected to present its report in the next GST council meeting likely in August last week, ET has learnt. Though the process may take longer time.
“This is going to be a comprehensive and complete overhauling exercise before we look at rate slabs,” a senior official told ET adding that no rate rationalisation is possible until classification related ambiguities are fixed, a challenge faced by the earlier group of ministers on rate rationalisation. This is a significant step as the GST tax slab is determined on the basis of product classification, and GST rate reform may not be feasible without rationalising the complex existing classification system, which is based on harmonised system of nomenclature (HSN) codes containing 21 sections with 1,244 headings.
Citing an example, the official said that flavoured milk attracts 5% tax if classified as milk, but 12% if classified as a beverage.
The official added that there are at least 60-70 items, and 18-20 services where minor tweaks in the composition or condition change the tax slab, raising unforeseen tax demand from the industry that is further complicated by multiple rulings by various courts.
Experts said the classification ambiguity is posing great tax uncertainty and challenges for the industry and resolving classification issues remains crucial before rationalising GST and determining the correct rates for goods. “The complexity of GST classification remains a significant challenge for both businesses and tax authorities and the current GST system, with its multiple tax rates and frequent updates, often causing confusion and disputes about the correct GST application,” Saurabh Agarwal, Partner, EY, told ET. He added that different GST rates for similar products, like roti (5%) versus paratha (18%) and raw meat (5%) versus prepared meat (12%), highlight these challenges.
“Therefore, the government should focus on resolving these classification issues as a step before rate rationalization, as the existing classification disputes may persist even after the rates are adjusted,” Agarwal added.
At present the GST structure has four tax slabs – 5%, 12%, 18%, and 28%. The Centre is looking at the feasibility of a three-rate structure, indicated by the CBIC chairman Sanjay Kumar Agarwal in his post budget interview to ET last week. The GST council will start the discussions on the rate rationalization in its upcoming meeting under the newly reconstituted GoM headed by Bihar minister Samrat Chaudhary.