Owing to its inherent nature, the levy under indirect tax legislations presupposes that the attributes of the supply (which is subject to the levy) have been determined. The rate of tax is ascertained on the basis of the attributes of such supply. It is therefore essential to delineate the essential features of the supply so as to categorise it within the rate schedule. This process of ascertaining the intrinsic attributes of the supply and consequent categorisation in the rate schedule is, pragmatically, known as “classification” in indirect tax legislations.
In the case of GST legislations, similar to other indirect tax laws, classification is given a detailed enunciation within the legislative framework. There are elaborate statutorily stipulated rules to determine whether the supply concerned is a supply of “goods” or “services” and thereafter classify such goods or services within the rate schedule (also known as “tariff”) to ascertain their tax ability and, if so, the applicable rate of tax on such supply.
Insofar as the classification inter alia determines the incidence of tax, it is often a contested issue between the taxpayer and the tax administration. The fact that classification is a complex process and various considerations, which are often an intermix of legislative stipulations and judicial observations, need to be factored makes classification a tedious process as well. The purpose of this article is to highlight the crucial nuances and demystify the attendant attributes underlying the classification process.
2. Ascertaining Nature of Supply
Whether the supply in question is a supply of “goods” or a supply of “services” is the first point of inquiry. This requires reference to the statutory definition of these expressions. For this purpose the Central Goods and Services Tax Act, 2017 (CGST Act) is the relevant legislation. In terms thereof, the expression “goods” is essentially linked to “movable property” with certain inclusions and exclusions. The expression “service” is also defined to essentially cover those things which are not covered within the scope of “goods”. Thus one is required to appraise, by applying these parameters, whether the supply in question is of goods or services. At this juncture it is noteworthy that certain supplies are, by way of deeming fiction, considered to be neither supply of goods nor supply of services and thus these supplies excluded from the levy of GST.
It is also possible that the supply under consideration is interwoven with multiple elements such that there is a combination of goods and services in a single supply. To deal with such cases, the CGST Act introduces two concepts; “composite supply” and “mixed supply”. The expression “composite supply” covers “naturally bundled” interwoven supplies wherein one of the supply can be considered as a “principal supply”. Other interwoven supplies where there is no principal supply are covered within the scope of expression “mixed supply”.
The consequence of the aforesaid determination is this. In the event the supply is determined to be of goods, then the rules governing classification of goods shall be applicable. In the event the supply is determined to be a service, then the classification of such service needs to be ascertained. Such classification, be it goods or services, will in turn determine the rate of tax applicable on such supply.
In the event the supply is either composite or mixed supply, then additional steps needs to be undertaken as under:
- The tax liability in case of a composite supply is determined by reference to the “principal supply”. Thus one needs to determine whether the principal supply in a composite supply is a supply of goods or services and on that basis apply the rules of classification of goods or services, as the case may be, even to the other elements of the composite supply.
- However in the case of mixed supply, each of the elements of the supply need to be ascertained for their respective classification as goods or services. Thereafter each such element needs to be classified within the goods or the services rate schedule, as the case may be. Once this exercise is complete, that individual component needs to be ascertained which attracts the highest rate of tax. Such component of the supply shall be the basis to determine the tax liability for the entire supply.
The aforesaid having been done i.e. one having determine whether the supply requiring classification is one of goods or services, the next step is to traverse through the rate schedule for goods or services, respectively. This in itself is a specialised and complex process and requires distinct appreciation of the relevant rules and principles which determine such classification.
It is noteworthy that while the stipulations as to what constitutes goods or services is a part of the statutory enactment, as discussed above, there is no statutory guidance on the inter se classification of these goods or services within the rate schedule. The CGST Act only creates a charge of tax and delegates the rate fixation exercise to the Government of India (GoI). In turn the GoI has issued various notifications entailing the classification of goods and services. These are adverted distinctively in the subsequent sections below.
3. Scheme of Rate Notifications under GST Legislations
Before dwelling in the scheme of rate schedule for goods and services, it is pertinent to note that the promulgation of these rates is by way of multiple notifications which is owing to the scheme of the GST laws.
- Notifications are issued by the GoI under the CGST Act. These stipulate the rate of tax applicable on intra-State supply of goods leviable under the CGST Act.
- Similar to the CGST Act, the State Legislatures have also enacted their respective State GST legislations. For example the Maharashtra Goods and Services Tax Act, 2017, the Tamil Nadu Goods and Services Tax Act, 2017, etc. Notifications are issued under these legislations by the respective State Governments. These notifications stipulate the rate of tax applicable on intra- State supply of goods leviable under the State GST legislations. These notifications mirror the notifications issued under the CGST Act.
- Notifications are also issued by the GoI under the Integrated Goods and Services Tax Act, 2017 (IGST Act). These stipulate the rate of tax applicable on inter-State supply of goods. By its design, the rate of tax in the notifications issued under the provisions of the IGST Act is equal to the sum of tax rate notified under the CGST and the State GST legislations.
- Notifications are further issued by the GoI under the Union Territory Goods and Services Tax Act, 2017 (UTGST Act). These stipulate the rate of tax applicable on intra–State supply of goods made in Union Territories. These notifications replace the void created by non-application in these Union Territories of the notifications under the State GST legislations.
In addition to the above, notifications are additionally issued by the GoI under the provisions of the Goods and Services Tax (Compensation to States) Act, 2017 (Compensation Act). The notifications under the Compensation Act set out the rate of “compensation cess” which is imposed in addition to GST on specific supplies.
The rate schedule for goods under the GST laws relates to the rate of tax vis-à-vis the goods enumerated in the schedules appended to the various rate notifications. At the bottom of the pyramid are goods which are subject to 0% tax i.e. those goods the supply of which is exempt. A list of these goods is separately notified. Within the rate schedule of taxable goods, the concessional rates are 5% and 12%, the standard rate is 18% and demerit rate is 28%. As part of the same rate schedule are the tax rates of 0.25% and 3% which are applicable to enumerates species of precious stones and minerals. All taxable supplies of goods are to be classified within these six rates which are notified under the various notifications, as discussed above. In addition, certain notified goods are subject to compensation cess levied under the Compensation Act.
The scheme regarding notification of the tax rates for goods equally applies in case of services. Notifications are issued under CGST Act, IGST Act, etc. to entail the tax schedule for services. Similar to the case of goods, there is a list of services the supply of which is exempt from GST. As regards taxable supplies, the rate schedule has 5%, 12%, 18% and 28% slabs for supply of services. These are no 0.25% or 3% rates in case of services.
4. Classifying Goods under GST Schedule
The scheme of each of the notifications is such that they set out the rate schedule and against such rate they further set out the “chapter/heading/sub-heading/tariff item” and “description of the goods”. For illustration, the first ten entries in the 18% schedule under the IGST notification state as under:
|Description of Goods|
|1.||0402 91 10, 0402 99 20||Condensed milk|
|2.||1107||Malt, whether or not roasted|
|3.||1302||Vegetable saps and extracts; pectic substances, pectinates and pectates; agar-agar and other mucilages and thickeners, whether or not modified, derived from vegetable products.|
|4.||1404 90 10||Bidi wrapper leaves (tendu)|
|5.||1404 90 50||Indian katha|
|6.||1517 10||All goods i.e. margarine, linoxyn|
|7.||1520 00 00||Glycerol, crude; glycerol waters and glycerol lyes|
|8.||1521||Vegetable waxes (other than triglycerides), beeswax, other insect waxes and spermaceti, whether or not refined or coloured|
|9.||1522||Degras, residues resulting from the treatment of fatty substances or animal or vegetable waxes|
|10.||1701 91, 1701 99||
All goods, including refined sugar containing added flavouring or colouring matter, sugar cubes
In order to appreciate the above table, one needs to be aware of the “Harmonised Commodity Description and Coding System” (commonly known as “Harmonised System” or “Harmonised System Nomenclature” – HSN) which is an internationally accepted standard for classification of goods. Under the harmonised system, all the possible goods which can be traded are classified under different sections and chapters on a scientific basis. This scheme has been adopted under the Indian Customs Tariff.
Under the harmonised system, as adopted in India, there is an eight-digit code assigned to each commodity. The first two digits represent the “chapter” within the harmonised system. (There are total 97 chapters in the harmonised system with a unique 98th chapter added by India.) The first four digits collectively represent a “tariff heading” which is a collation of goods with similar characteristics or attributes housed under a chapter. The first six digits represent “tariff sub-heading” which comprises of similar goods under a tariff heading. The eight digit code is known as the “tariff entry” and is housed under a sub-heading.
Applying the aforesaid scheme of harmonised system to demystify the illustrations in the above table, the first entry in the table covers two tariff entries i.e. 0402 91 10 and 0402 99 20 and against both these entries the description of the goods is “condensed milk”. In order to appreciate the coverage of this entry, we are required to traverse to Chapter 4 (i.e. the first two digit of the tariff entries). This Chapter 4 covers “dairy produce; birds’ eggs; natural honey; edible products of animal origin, not elsewhere specified or included”. Tariff heading 0402 (i.e. the first four-digit of the tariff entries) covers “milk and cream, concentrated or containing added sugar or other sweetening matter”. Within this tariff heading, sub-heading 0402 91 covers “not containing added sugar or other sweetening matter” and sub-heading 0402 99 covers “other”. This implies that the goods concerned must satisfy the coverage of this chapter, heading, sub-heading and tariff heading while also meeting the description of “condensed milk” and then alone would such goods be classified under the first entry in the above table.
As another illustration, the second entry in the table states “1107” and covers “malt, whether or not roasted”. Given that there is only a four-digit reference in this entry, it implies that the scope of this entry is much wider as it covers all goods with the tariff heading and not any particular tariff entry.
The above table also reveals a conscious legislative choice as regards classification of goods for GST rate purposes. In some cases the same tax rate applies to the entire tariff heading, such as in Entries 2, 3, 8 and 9 in the table. In some cases, the same tax rate extends only to the tariff sub-heading, such as in Entries 6 and 10. Whereas in certain cases the tax rate is notified vis–à–vis the tariff entry alone, such as in case of Entries 1, 4, 5 and 7. In other words classification at a tariff entry-level becomes crucial and classification at chapter, tariff heading and tariff sub-heading level alone may not be sufficient in order to classify the goods within the GST rate schedule.
The classification of goods under the tariff entries, however, is not an easy exercise. The Indian Customs Tariff has incorporated detailed “rules for interpretation” which assist in determining the classification within the customs tariff. These rules are applied even for determining the classification for GST purposes. Basis these rules, one determines the customs classification of the goods and thereafter positions them in the GST rate schedule to determine the applicable rate of tax.
The fact that the harmonised system for classification of goods has been in vogue for decades and is a fairly evolved internationally accepted method, the extension of this scheme of classification of goods under GST laws does add to complexity but still instils an objective and rationale-based classification process. Given that the scope of each of the tariff heading under the harmonised system is supplemented by a detailed technical explanation by way of “explanatory notes”, the reliance on the harmonised system introduces relative stability and consistency in the classification process.
A number of advance rulings issued under the GST regime have followed the harmonised system as the basis for classification and such rulings have even been sustained by the appellate authority for advance ruling. For illustration, the Tamil Nadu Appellate Authority in Saro Enterprises observed that the harmonised system “is a dependable guide for interpreting” the tariff. As another illustration, the Maharashtra Appellate Authority in Taraltec Solutions (P) Ltd. sustained the classification undertaken by the authority for advance ruling inter alia with the following observations:
“While the appellant’s submission, that their product is meant for poor masses of rural India located in villages and that their product has acclaimed honour from various State Governments and also from the Prime Minister’s office in India for being an innovative product, is in itself commendable, yet under the GST law the classification of any commodity is not governed by such factors, but by the nature, design, character, and function of the article. The argument of the appellant therefore does not have any bearing on the case.”
The same principle was espoused by the Telangana Appellate Authority in Nagarjuna Agro Chemicals (P) Ltd. wherein it was observed that “[i]t is a well-settled legal proposition that where the tariff schedule is based upon and structured on the same pattern as the HSN, the HSN notes are relevant and a safe guide for deciding issues of classification”. Thus the harmonised system effectively sets the tone for classification of goods under the GST tariffs and the consequent determination of the tax incidence.
The principles underlying the harmonised system are, however, sometime disbanded to account for a popular meaning based classification of goods. Known as the “common parlance” test, this principle of classification of goods requires ascertainment of the manner in which the goods are construed by those dealing with them. Unlike the harmonised system, however, essentially this test is a judicial innovation and does not find statutory support. Nonetheless it has been applied for the classification of goods under the GST laws. As an illustration, the Maharashtra Appellate Authority in Spageage Syntex (P) Ltd. applied this test to reverse the ruling of the authority for advance ruling and decide in favour of the applicant by accepting the evidence on common parlance in respect of the subject goods. The application of this test, however, is a laborious exercise as it presupposes that the relevant market is surveyed and corroborative evidence is collated which justifies the consistent reference of a particular commodity in a particular manner so as to overbearingly outweigh other considerations for its classification.
5. Classifying Services under GST Regime
There is a distinct “scheme for classification of services” which has been notified by the GoI. Similar to the HSN tariff entry for each class of goods, there is a distinct tariff entry for each class of services which is popularly known as SAC (for “Service Accounting Code”). The SAC is a six-digit code with the first two digits remaining constant at “99”. In other words 99 is the prefix of all SAC unlike HSN for goods which varies depending upon the chapter of the harmonised system within which the goods concerned are classified. In this scheme, the third digit of the SAC refers to “section”; the fourth digit refers to “heading”, the fifth digit refers to “group” and all the six digits together constitute the unique SAC of the service concerned.
This scheme of SAC has been adopted from the “Central Product Classification” developed by the United Nations (commonly referred as “UN CPC”). The UN CPC has ten sections but under the SAC there are only five sections i.e. “5 – Construction services”; “6 – Distributive trade services; accommodation, food and beverage service; transport services; gas and electricity distribution services”; “7 – Financial and related services; real estate services; and rental and leasing services”; “8 – Business and production services”; and “9 – Community, social and personal services and other miscellaneous services.”
Each of these sections have headings attached to it. For illustration, Section 5 has only one heading i.e. “9954 – Construction services”. However Section 6 has multiple headings i.e. “9961 – Services in wholesale trade”; “9962 – Services in retail trade”; “9963 – Accommodation, food and beverage services”; “9964 – Passenger transport services”; “9965 – Goods transport services”; “9966 – Rental services of transport vehicles with or without operators”; “9967 – Supporting services in transport”; “9968 – Postal and courier services”; and “9969 – Electricity, gas, water and other distribution services”.
Each of the headings is further comprised of “groups”. For illustration, Heading 9954 is comprised of the following groups: “99541 – Construction services of buildings”; “99542 – General construction services of civil engineering works”; “99543 – Site preparation services”; “99544 – Assembly and erection of prefabricated constructions”; “99545 – Special trade construction services”; “99546 – Installation services”; and “99547 – Building completion and finishing services”.
Each of the groups has service tariff entries or SACs. For illustration, Group 99541 is comprised of the following SAC: “995411 – Construction services of single dwelling or multi-dwelling or multi-storied residential buildings”; “995412 – Construction services of other residential buildings such as old age homes, homeless shelters, hostels and the like”; “995413 – Construction services of industrial buildings such as buildings used for production activities (used for assembly line activities), workshops, storage buildings and other similar industrial buildings”; “995414 – Construction services of commercial buildings such as office buildings, exhibition and marriage halls, malls, hotels, restaurants, airports, rail or road terminals, parking garages, petrol and service stations, theatres and other similar buildings”; “995415 – Construction services of other non-residential buildings such as educational institutions, hospitals, clinics including veterinary clinics, religious establishments, courts, prisons, museums and other similar buildings”; “995416 – Construction services of other buildings nowhere else classified”; and “995419 – Services involving repair, alterations, additions, replacements, renovation, maintenance or remodelling of the buildings covered above”.
Basis this broad classification amongst the sections, headings and groups, one must determine the SAC classification of the service concerned. In order to delineate the scope of each SAC, the GST Council has issued the “Explanatory Notes to the Scheme of Classification of Services”. These explanatory notes, which are based on the explanatory notes to the UN CPC, entail the scope, inclusions and exclusions within each of the SAC. Thus these explanatory notes provide practical or rather binding guidance in respect of the classification of the services amongst the various SAC. So much so that the reliance placed upon the explanatory notes for the purpose of classifying the services by the authority for advance ruling in Esprit India (P) Ltd. has been upheld by the Haryana Appellate Authority.
That classification of goods is not easy can be gauged from the fact that there are over 5000 tariff headings, what to say of tariff entries. Furthermore, owing to economic, political or other reasons of fiscal policy, there are frequent amendments in the rate schedule which require realignment and revalidation of the classification hitherto adopted. The same holds true for classification of services. It is therefore essential while undertaking classification that one is precisely aware of the relevant considerations and principles attendant to the classification exercise, be it goods or services.
† Advocate, Supreme Court of India; LLM (Taxation), London School of Economics.
 S. 2(52), CGST Act states that “goods means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply”.
 S. 2(102), CGST Act states that “services means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged. Explanation.— For the removal of doubts, it is hereby clarified that the expression ‘services’ includes facilitating or arranging transactions in securities.”
 S. 7(2), CGST Act. Such supplies are enlisted in Sch. III of the CGST Act and cover supplies such as: “Services by an employee to the employer in the course of or in relation to his employment; Services by any court or Tribunal established under any law for the time being in force”; etc.
 S. 2(30), CGST Act states that “composite supply means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply. Illustration.— Where goods are packed and transported with insurance, the supply of goods, packing materials, transport and insurance is a composite supply and supply of goods is a principal supply.”
 S. 2(74), CGST Act states that “mixed supply” means two or more individual supplies of goods or services, or any combination thereof, made in conjunction with each other by a taxable person for a single price where such supply does not constitute a composite supply. Illustration.— A supply of a package consisting of canned foods, sweets, chocolates, cakes, dry fruits, aerated drinks and fruit juices when supplied for a single price is a mixed supply. Each of these items can be supplied separately and is not dependent on any other. It shall not be a mixed supply if these items are supplied separately.
 S. 8, CGST Act states that “the tax liability on a composite or a mixed supply shall be determined in the following manner, namely: (a) a composite supply comprising two or more supplies, one of which is a principal supply, shall be treated as a supply of such principal supply; and (b) a mixed supply comprising two or more supplies shall be treated as a supply of that particular supply which attracts the highest rate of tax.”
 S. 9, CGST Act.
 For illustration, see Notification No. 2/2017—Central Tax (Rate) dated 28-6-2017.
 For illustration, see Notification No. 12/2017—Central Tax (Rate) dated 28-6-2017.
 For illustration, see Notification No. 8/2017—Integrated Tax (Rate) dated 28-6-2017.
 Sch. III, Notification No. 1/2017—Integrated Tax (Rate) dated 28-6-2017.
 For details, see <http://www.cbic.gov.in/htdocs-cbec/customs/cst1819-010219/cst1819-0102-idx>.
 For details, see <http://www.cbic.gov.in/resources//htdocs-cbec/customs/cst1819-010219/ General_Notes_010219.pdf>.
 For illustration, see Expln. (iv) to Notification No. 1/2017—Integrated Tax (Rate) dated 28-6-2017.
 Order No. 16/AAR/2018, dated 27-9-2018, available at <http://gstcouncil.gov.in/sites/ default/files/ruling-new/TN-16-AAR-2018-SE.pdf>.
 Order No. MAH/AAAR/SS-RJ/16/2018-19, dated 4-2-2019, available at <http://gstcouncil. gov.in/sites/default/files/appelate-authority/Taraltech-Solutions-Pvt-Ltd.pdf>.
 Order-in-Appeal No. AAAR/03/2018 (A.R.), dated 26-9-2018, available at <http://gstcouncil. gov.in/sites/default/files/appellate-authority/AAAR-03-2018-Nagarjuna%20Agro%20Chem. pdf>.
 Order No. MAH/AAAR/SS-RJ/23/2018-19, dated 13-3-2019, available at <http://gstcouncil. gov.in/sites/default/files/appelate-authority/Mah.AAAR_SSRJ.23-2018-19__13.03.19.pdf>.
 Annexure, Notification No. 11/2017–Central Tax (Rate) dated 28-6-2017.
 For details, see <https://unstats.un.org/unsd/classifications/unsdclassifications/cpcv21.pdf>.
 The five sections comprised of UN CPC but not adopted in SAC are: “0 – Agriculture, forestry and fishery products”; “1 – Ores and minerals; electricity, gas and water”; “2 – Food products, beverages and tobacco; textiles, apparel and leather products”; “3 – Other transportable goods, except metal products, machinery and equipment”; and “4 – Metal products, machinery and equipment” as these essentially relate to goods and not services.
 Advance Ruling No. HAR/HAAR/R/2018-19/6, dated 11-4-2018, available at <http://gstcouncil.gov.in/sites/default/files/ruling-new/Haryana-AR%2006_2018-19%20dt.11.04.18%20EIPL.pdf>.
 Appeal Case No. HAR/HAAAR/2018-19/02, dated 22-11-2018, available at <http://gstcouncil.gov.in/sites/default/files/appellate-order/Esprit-India-Private-Limited-22-11-2018.pdf>.