Introduction: Classification of Goods or Services is extremely critical activity in GST implementation. Among other aspects the 'Accounting System' should clearly capture following:
a) The description of the product or the service,
b) The nature of the transaction,
c) HSN (Harmonized System Nomenclature) /SAC (Service Accounting Code),
d) Taxability or as the case may be the exemption of the product or the service,
e) Date of commencement of taxability with the relevant tax rate.
For all assesses having a turnover of Rs 5 crores and above it is mandatory to mention the HSN/SAC code of the product or the service on the tax invoice. From above it is evident that improper classification of goods or service would not only cause serious hardships to the accounting team but would also land the assessee in unwarranted and avoidable tax issues. Considering the importance that classification has on the implementation of GST, below is an endeavour to capture quick points, which should be considered for correct classification of goods or services.
1. Harmonized System Nomenclature (HSN): The classification of Goods in GST is based on Harmonized System Nomenclature (HSN). The description as envisaged in HSN is one of the important aspects to be considered for classification and stands to be a safe guide for ascertaining the true meaning of any expression used in the Act(Wood Crafts Products Ltd,1995 (77) ELT 23 (SC) .
2. Specific Vs General: Priority should be given to classification that is more specific rather than the one which is general. The words 'More Specific' means the one which gives more proximity or nearness.
3. Principal Function Of The Product: The ultimate use of the product becomes critical aspect for classification in cases where the description itself specify the use of the product. However, this criterion should be judiciously used as the condition or the form in which the product is delivered plays a vital role in its classification.
4. Essential Character Of The Product: The essential character of a product could be derived from its components. For example in case of a multifunctional product like say 'Smart Phone'�, which could perform myriad functions like scanning, communication, navigation etc it is critical to dissect the utility of the product to decipher that 'Unique Principal Function'� which gives the product its essential character. In such cases, dividing the total cost of the smart phone into costs of individual components which ultimately yield to total cost is essential. Finally, the function towards which majority of the components point would be the ultimate 'Principal Function'. Similarly, a person dealing in the product or the subject matter expert could also aid in ascertaining the essential character of the product. However, this should be sparingly used as the expert opinion cannot be a deciding or binding factor.
5. ISI Specifications: Certification marks for industrial products do grant some degree of inputs in ascertaining the classification. However such specifications speak about the quality of the product and therefore their utilization in classification should also be very judiciously used.
6. Commercial Or Trade Parlance: The manner in which people dealing with the product understand and correlate to the product is critical in ascertaining the classification of the product. The popular meaning and acceptance of the meaning by those in trade give strength to the statue to make the needed classification. However, it should be borne in mind that where the statute specifically defines a product, always the statue will take precedence over the commercial understanding of the product in the trade.
7. Beneficial Classification: Where the legislature fails to clearly lay down the provisions of law, then the benefit of the doubt is given to the manufacturer. Thus when ambiguity exists due to inadequate clarity in the law then the classification which is beneficial to the manufacturer has to be adopted.
8. Other Aspects:
a) Once a supplier of goods accepts any particular classification then the same cannot be changed by the relevant jurisdictional officer.
b) Exemption notifications cannot prescribe the norms for classification.
c) While classifying the product the tariff description prevailing at the relevant period should only be used. This should particularly be borne in mind when there are amendments made in the tariff.
d) At times, the contents of the speech of Finance Minister is extremely useful in understanding the context in which specific changes are being introduced and therefore also aid in classification activities.
e) The burden of proof of a particular classification is on the department. The burden would, however, be on the assessee if it is proved that the classification adopted by the assessee is completely incorrect.
Conclusion: Careful and deep understanding of the statue at the initial stage of GST implementation is a non-negotiable requirement. A Proper understanding of the product or the service and accordingly classifying the same, coupled with retaining appropriate documentation evidencing the basis for classification could certainly prevent an unwarranted drain on resources in long drawn legal issues.
The Author of the article can also be reached at rajeevj12@gmail.com
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