GST Council meetings: Waste of time and resources

Of late, the meetings of the GST Council are becoming like the annual Union Budgets - raise expectations only to disappoint the taxpayer later. Much was expected from the 40th meeting of the GST Council but what transpired was only a few token measures.

It reduced late fee and interest for those with tax liabilities and waived off late fee completely for those with no tax liabilities. There was also an announcement prior to the meeting that nil returns could be filed through SMS also.

There was nothing on GST rates and nothing on how the Council plans to quench the thirst of the states for their pound of flesh. There were some indications given of GST collections - around Rs 45,000 crore. It is a moot point to discuss whether the Council should spend so much to time and resources to discuss things such as late fees and penalties.

The Central Board of Indirect Taxes and Customs (CBIC) can be given this responsibility with a mandate to run their proposals through the Council. The Council has plenty of reasons to have detailed meetings at regular intervals. With the GST Appellate Tribunal yet to get up and running due to its faulty constitution, tax payers have no option but to approach the Authority for Advance Rulings (AAR) to resolve their issues. It is nobody’s guess that had the Tribunal been formed, many issues decided by AARs across the country would have landed up before the Tribunal.

The decisions of the AAR on GST can range from the controversial (Rajasthan AAR on directors’ remuneration) to the ordinary (most AAR’s on anti-profiteering). A recent decision of the Karnataka AAR hits a person where it hurts the most - his stomach.

In the case of ID Fresh Foods, the AAR ruled that frozen parota would attract 18% GST and not 5% since it does not meet the definition of roti or khakra. Social media was abuzz with jokes about the decision.

A government official even went to the extent of defending the decision and stated that the poor do not eat frozen parota. In these times, the last thing the nation needs is a justification to levy a higher tax on the rich and a lower tax on the poor.

The crux of the problem lies in the Harmonised System of Nomenclature (HSN) Codes that we decided to needlessly bring into the GST law from the erstwhile laws. It is understandable to have a laundry list of HSN Codes for customs laws but not for a largely domestic law such as GST.

The problem lies in the fact that this laundry list is extremely lengthy, has innumerable chapters and sub-headings within chapters - it almost looks like a work of modern art with a title. Due to this, readymade garments and readymade sarees can have two different codes and rates and we can have complicated entries such as oil-cake and other solid residues, whether or not ground or in the form of pellets, resulting from the extraction of vegetable fats or oils, other than those of heading 2304 or 2305 (this falls under Heading 2306).

In the case of ID Foods, the controversy was whether parota would fall under Heading 1906 “Bread, pastry, cakes, biscuits and other bakers’ wares, whether or not containing cocoa; communion wafers, empty cachets of a kind suitable for pharmaceutical use, sealing wafers, rice paper and similar products” or under Heading 2106 that covers “preparations for use, either directly or after processing (such as cooking, dissolving or boiling in water, milk, etc.), for human consumption, provided that they are not covered by any other heading of the Nomenclature.”

ID contended that the product merits classification under Chapter heading 1905, under the product description of ‘Khakhra, plain chapatti or roti” quoting Notification No. 1/2017-Central Tax (Rate) as amended by Notification No.34/2017-Central Tax (Rate).

Notification No.34 inserted a new entry No.99A with the description “Khakhra, plain chapatti or roti”, without defining the said description. The AAR was of the opinion that 2106 suited frozen parotas better since it is not khakra, plain chapatti or roti.

Why khakra?

Though it is not within the purview of the AAR, no one questioned as to why the persons who drafted the HSN Codes did not think of including a staple Indian food such a parota in the Code but could think of a not-so-common item such as Khakra. Did they intend parota when they meant plain roti? Can parota be included under “similar items” mentioned in HSN Code 1906? Should plain parota also be taxed at 18%? It is to be noted that the decision of the Karnataka High Court is silent on plain parota. One more AAR decision?

The CBIC may not want to make an effort to simplify the HSN Code merely due to the number of entries therein and the sheer effort that this task can take. They can make a beginning though by restricting the HSN Code only to the chapter headings. Next, they can attempt a rationalisation of the chapter headings.

In the case of parota, “Ready to eat foods” can be one chapter heading instead of having different codes for different types of parota. Since the rates of tax are only around 7 or 8, there is no necessity for the HSN Code to nit-pick as to how aluminium rods are cut.

We can only hope another AAR does not rule that the variety of parota called Ceylon Parota has to suffer both Customs Duty and IGST because it has a foreign name. They may also be asked the question - what would be the GST rate if ID Foods puts a label “Indian Bread’’ on the outside of the packet and two frozen parota inside? It is time the GST Council got real and gave out instructions to simplify the HSN Code.

As on date, if taxpayers were quizzed as to whether the erstwhile system of indirect taxes was better than GST, it would not be a surprise if the majority said ‘yes’. The GST Council has its work cut out on trying to reverse this opinion.

(The writer is a tax expert based in Bengaluru)