Classification and Its Relevance in GST Regime

India being a signatory to the International Convention on the Harmonized Commodity Description and Coding System, 1983, has adopted the classification codes and the General Rules of Interpretation (GI Rules) as prescribed under the Convention. The classification of goods is governed by the provisions under the CTA. The First Schedule to the CTA specifies the nomenclature that is based on the Harmonised Commodity Description and Coding System generally referred to as “Harmonized System” or simply “HS”, developed by the World Customs Organization (WCO).

Methodology of Classification

The Harmonised System (HS) provides commodity/product codes and description up to 4-digit (Heading) and 6-digit (Sub-heading) levels only and member countries of WCO are allowed to extend the codes up to any level subject to the condition that nothing changes at the 4-digit or 6-digit levels. India has developed 8-digit level classifications to indicate specific statistical codes for indigenous products and also to monitor the trade volumes. For legal purposes the texts of the section notes, chapter Notes, subheading notes, supplementary notes, headings, subheadings, and the GI rules should be relied upon to determine the classification of an item.

General Rules for Interpretation (GI Rules)

Classification of goods covered under the First Schedule to the CTA, is done as per the GI Rules. The GI Rules is a set of six rules for classification of goods in the Tariff Schedule. These rules have to be applied sequentially:

• Rule 1: Rule 1 gives precedence to the section or chapter notes while classifying a product.
• Rule 2: Rule 2(a) applies to goods in incomplete or unfinished condition having essential character of complete or finished goods, presented in unassembled or disassembled form. Rule 2(b) is applicable to ‘mixtures’ and ‘composite goods’.
• Rule 3: Goods which cannot be classified by application of Rule 2(b), shall be classified by application of Rule 3, i.e., by application of ‘most specific description’ as per Rule 3(a) or by ascertaining the ‘essential character’ of the articles per Rule 3(b) or by taking into consideration the heading that occurs last in the numerical order as per Rule 3(c).
• Rule 4: Goods which cannot be classified in accordance with the above rules will be classified under the heading appropriate to the goods to which they are most akin, by application of Rule 4.
• Rule 5: Rule 5(a) and (b) relate to classification of packing materials and packing containers.
• Rule 6: Rule 6 lays down that for legal purposes, the classification of goods in the sub-headings of a heading shall be determined according to the terms of those sub-headings and any related sub-heading notes and, mutatis mutandis, to the above rules, on the understanding that only sub-headings at the same level are comparable. For the purposes of this rule the relative section and chapter notes also apply, unless the context otherwise requires.

HSN and Classification Jurisprudence

The CTA is based on harmonised system of nomenclature; but Tariff nowhere states that notes in HSN will be applicable for its interpretation. For the purpose of uniform interpretation of HSN, the WCO has published detailed explanatory notes to various heading and sub-headings. WCO in its various committees discusses classification of individual products and gives classification opinion of the same. Such information, though not binding in nature, provides a useful guideline for classifying goods.

As discussed supra, the Customs Tariff generally is based on the tariff classification adopted by WCO in its harmonised commodity description of coding system. Hence, wherever a chapter of Customs Tariff is fully aligned with the corresponding chapter of HSN, the HSN explanatory note explaining the scope of headings of that chapter would have persuasive value in the determination of scope of headings of correspondence chapter of customs Tariff. It is therefore fairly settled that the explanatory notes provided in HSN is an important aid for ascertaining the classification of a product.

Principles of Classification Evolved by Courts and Tribunals

In addition to the aforesaid rules and principles of classification, certain principles for classification have been evolved over time by the Courts and Tribunals. Few of such significant principles are:

Classification Disputes under GST

The Central Board of Indirect Taxes and Customs (CBIC) has issued notifications prescribing rate of applicable on supply of goods falling under different chapters, chapter headings or tariff Items. The tax rates are revised from time to time as per the recommendations of the GST Council. These rates are divided among multiple slabs (Nil, 0.25%, 3%, 5%, 12%, 18% and 28%) and taxability of each of the products is dependent on its classification. It is therefore natural to expect disputes in determining classification of goods on account of the difference in interpretation of entries in the rate notification between taxpayers and authorities. The CBIC has issued Circulars providing clarification on classification of goods and services from time to time; however, some of these clarifications have led to unsettling the issue.

Recent Amendments in HSN Reporting

The CBIC has notified¹ that taxpayers with turnover upto INR 5 crores and beyond are required to mention HSN at 4 digit and 6 digit, respectively, on their tax invoices with effect from 01.04.2021.

It is also pertinent to note that taxpayers are mandatorily required to mention 8 digits Tariff Entry for certain category of goods² falling under Chapter 28 (organic chemicals), Chapter 29 (pharmaceutical products), Chapter 38 (miscellaneous chemical product) and Chapter 39 (plastics and articles thereof) with effect from 01.12.2020.

The taxpayers claiming refund of ITC are also required to provide category of input supply along with HSN wise details³ of goods and services in their refund application (in Annexure ‘B’), so as to enable the authorities to easily identify the goods and services.

Endnote

Determination of classification of goods is not a new phenomenon for importers and manufacturers. It has, however, gained more prominence now since it is one of the mandatory requirements for almost all the taxpayers (including service providers) under GST regime. It is therefore imperative for taxpayers to take due care in identifying accurate classification of goods and services supplied by them. Supplying goods or services under incorrect classification may not only result in tax disputes but also attract penal provisions. It is therefore advisable for all taxpayers to regularly review the correctness of classification adopted with respect to goods or services supplied by them.