Under Indirect Tax Laws, classification is the categorization of goods or services crucial to ascertain whether a subject matter is exigible to tax, exemption, rate of tax etc. In GST regime, classification of goods has to be in accordance with Customs Tariff Act which is based on the Harmonized System of Nomenclature (HSN). The classification of services is based on the service code (tariff). Classification of goods or services is a complex procedure of ascertaining whether goods or services are composite, non-composite or mixed, and how to resolve competitive entries etc.
To provide some solution to these issues, the Indirect Taxes Committee of the ICAI has come out with “E-Handbook on classification under GST”. This e-publication interalia covers meaning, need, principles/rules to be considered, steps to be followed etc. for aptly classifying goods/services. This e-handbook provides a deeper knowledge of provisions pertaining to Classification of goods and services under GST in a simplified manner along with relevant notifications issued and few judicial pronouncements
The term “Classification” is defined as systematic arrangement in groups or categories according to established criteria. Under the given concept, the arrangement of varied items is into mutually exclusive but related classes.
Under the Indirect Tax regimes prevalent across the Globe including India, the classification of various items which are the subject matter of tax, be it goods or services, is an essential and integral part of the whole levy and collection mechanism. It is important both from the taxpayer’s perspective and tax collector’s perspective to have a definite class or group under which subject matters of tax can be divided. The primary intention of classifying them is to determine whether or not the same would be encumbered by the levy of these taxes and if so, under which category the tax liability would arise.
However, the requirement of classification is not restricted only for understanding the rate of tax on a specific subject matter of tax. The various benefits of classification are as under:
1. Leviability of Tax
Classification of subject matters of tax into various classes identifies the taxable and nontaxable items for determining the scope of leviability of tax through a particular legislation.
2. Goods versus Services
After determining whether a particular subject matter is leviable to tax or not, classification principles further assist in determining if they are taxable as goods or as services. The differentiation between ‘goods’ and ‘services’ not only impacts the rate of tax, but also the time, place and value for the tax.
The Government exempts specific categories of items from levy of taxation. Exemption from tax is a policy decision of the Government which finds its base from the classification of items into specific categories which are driven by various socio-economic factors.
4. Rate of Tax
The Government is assisted by the principles of classification to identify the demerit and merit rates of various categories of items. Such categorization helps the Government to ensure that the burden of taxation is not regressive for the tax payers and also does not negatively affect the revenue collection for the Government.
5. Standardization and avoiding differentiation
Classification also helps the Government to collect data about various trades and industries in a systematic and standardized manner. Further it helps to bring on par various similar and like items sold by different industries and sizes of business to ensure uniformity.
Chapter Page no.
1. Introduction 1-4
2. Identification of Supply of Goods or Services 5-8
3. Classification of activities which are neither Supply of Goods nor Supply of Services 9
4. Identification of Composite Supplies or Mixed Supplies 10-24
5. Classification of goods as per Notification 25-32
6. General Rules of Interpretation 32-40
7. Classification Principles Evolved By Courts 41-44
8. Classification of Services as per Notification 45-52
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Classification under Goods and Services Tax
Across the Globe under various GST regimes, classification as a subject is not a complex issue for the simple reason that across the Globe, most economies have a two rate GST structure. Under such structure, the two rates are Merit Rates and Demerit Rates. All the items under the ambit of GST are classified under given two rates only. The merit rate is the rate which is closer to 5% tax bracket and demerit rate is the rate which is within the bracket of 16% to 20%. Hence disputes for classification under GST are less or minimal.
Under the Indian environment, the GST is also indigenous. Hence the issues relating to classification which are not prevalent across the world are applicable in India. There are various reasons which add up to the complexity under the classification in India. One major reason for same is the multiple GST Rate structure. Today, Indian GST has 8 different types of GST Rates namely 0%, 0.25%, 1%, 3%, 5%, 12%, 18% and 28%. Since the industry structures are different and exemptions add to this complex web of multi point rate structure, a situation of arbitrage due to classification arises