SHOULD A frozen paratha be taxed at the same GST rate as a roti or a chapati? Companies in the business say the rate can’t be higher since the principal ingredient for both is whole wheat flour. But after fighting for over 20 months, the producer, in this case, Vadilal Industries Ltd, has been told that paratha would attract 18 per cent. The chapati, however, attracts only 5 per cent GST.
The Goods and Services Tax (GST) regime completed five years in July this year, but the industry and tax authorities are still untangling classification disputes triggered by the complexities in the indirect tax regime rate structure. On September 15, in a fresh ruling, Gujarat’s Appellate Authority for Advance Ruling (AAAR) made a clear distinction between packed /frozen parathas and rotis.
The appellate authority’s order has effectively upheld a June 2021 order of Gujarat’s Authority for Advance Ruling, which had said that such packaged parathas require 3-4 minutes of cooking till it turns golden brown on both sides, and that the wheat component in the paratha varies between 36 per cent and 62 per cent.
The latest ruling marks a distinction from an earlier 2018 order of Maharashtra’s AAR, wherein it was held that various types of Indian breads are called by different names, and classification should not merely be guided by nomenclature. This was cited by Vadilal when it appeared before the appellate authority in Gujarat.
The roti versus packaged paratha debate is just one of the many disputes that are testing the GST’s robustness in India’s food industry. Tax authorities and manufacturers have previously sparred over Marico’s Parachute — whether it was hair oil or just coconut oil, Fryum — if it’s a papad or not, Nestle’s KitKat —biscuit or chocolate, and Dabur’s Lal Dant Manjan — tooth powder or a medicinal drug.
In the latest ruling, Ahmedabad-based Vadilal had appealed against an earlier AAR order for supplies of its eight varieties of paratha — Malabar, mixed vegetable, onion, methi, aloo, laccha, mooli and plain. “The parathas supplied by the appellant are different from plain chapati or roti and cannot be treated as or covered under the category of plain chapati or roti and appropriate classification of parathas would be under Chapter heading 2106,” the authority said in a ruling dated September 15.
The appellant was earlier this year also entangled in another classification dispute wherein it had appealed against an AAR ruling for treating flavoured milk similar to milk. The Gujarat AAAR then ruled that flavoured milk is different from milk and hence, it can’t avail of GST exemption. Flavoured milk is taxed at 12 per cent under GST, while milk is exempt. The authority has ruled that parathas are different from plain rotis or chapatis and hence, need to be taxed at 18 per cent.
In August last year, Tamil Nadu AAR had ruled that ready-to-cook dosa, idli, porridge mix, etc sold in powdered form are taxable at 18 per cent, even though the GST rate is 5 per cent if they are sold as batter, while Gujarat AAR had ruled that 5 per cent GST is payable on puri papad and unfried papad. In December 2021, Karnataka AAR had ruled that 18 per cent GST is payable on rava idli dosa.
Earlier, in November 2019, the Madhya Pradesh’s AAR responded to a petition filed by Alisha Foods over whether Fryums should be classified as papad (taxed at 5 per cent), or as a residual entry for food items not specified elsewhere (taxed at a higher 18 per cent) by ruling that it was the latter. The Karnataka bench of AAR in June 2020 had specified ready-to-eat parotta as different from khakhra, chapati or roti.
These classification disputes date back to the pre-GST regime, with companies trying to fit in their products under lower tax slabs to keep the overall price down and, in turn, trying to maximise their own margins, given that excise duty, service tax, VAT or now GST are all indirect taxes and hence, embedded in the price of the product. The taxman would be interested in doing just the reverse, to maximise tax gains by ensuring products are clubbed into slabs that attract bigger taxes.
As law leaves scope for ambiguity, many FMCG majors have been known to engage in such classification disputes with the revenue authorities. One of the celebrated cases involved KitKat. In the Nestle (India) Ltd versus the Commissioner of Central Excise, Mumbai, 1999, dispute, the ruling went in Nestle’s favour that the product was a biscuit and not a chocolate, which meant a lower tax rate burden for the manufacturer.
Marico, the manufacturer of Parachute coconut oil, has also had run-ins with state governments on whether its flagship product was a hair oil or merely coconut oil. In 2003, Dabur India was embroiled in a dispute with tax authorities regarding classification of Lal Dant Manjan as a tooth powder or medicinal drug. The tax authorities classified it as tooth powder.
Tax experts said there has been a history of such classification disputes and multiple rates leave scope for ambiguity and the solution henceforth lies in establishing a central authority. The government has stated its intentions to move towards a lesser number of tax slabs under GST, though a uniform rate is seen unfavourable for a country like India which has wide income disparity and hence, clubbing of consumption of luxury products with essentials and necessary items do not find favour.
Abhishek Jain, Tax Partner, KPMG said, “Correct classification of goods is of key importance under any tax legislation. Further, classification disputes have been routine across various tax laws since time immemorial, and have been a pain point for businesses. To understand the correct classification various principles are evaluated such as substance over form, technical literature of the product, understanding in common parlance, etc. While AARs have given clarity on various classification disputes since inception of GST, the judgements sometimes vary from one State to another. The need in today’s time is to set-up a Central AAR to resolve such conflicts, and ensure uniform applicability across the nation, as is the vision of the GST law.”
