The Central Board of Indirect Taxes and Customs (CBIC) is in the process of compiling a catalog of items that become subjects of litigation solely because of classification discrepancies.
The fitment committee is expected to examine instances where slight alterations in composition lead to varying tax brackets, causing confusion in tax obligations, particularly within the fast-moving consumer goods (FMCG) sector, which has recently encountered a surge in tax notifications.
Individuals familiar with the matter stated that the list will be forwarded to the group of ministers on the rate rationalization committee during the next meeting of the Goods and Services Tax (GST) Council.
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“Classification issue is a problem with some products and the fitment committee is working on the detail list where there is grey area and which has attracted maximum litigation,” a senior official told.
According to the official, there are approximately 25 to 30 goods and services that exhibit overlapping categorization.
Finance Minister Nirmala Sitharaman also raised the issue during her meeting with enforcement officials of both central and state goods and services tax, urging the board to address classification-related issues as a “priority.”
“The fitment committee is looking into the matter and when the council meets next, the proposal will be referred to the group of ministers on rate rationalisation,” the official said.
In November last year, numerous FMCG companies utilizing the “extruded” method for manufacturing chips and namkeens were instructed to remit 18% GST instead of 12%, resulting in the issuance of tax notices for the outstanding amount due by March 31, 2024. Extrusion is a food processing method employed to produce “puffed” or “expanded” snacks that are readily consumable. These snacks are primarily crafted from cereal flour or starches, characterized by their high calorie and fat content, along with low protein, rendering them perceived as unhealthy.
In August 2023, the Center clarified that any snacks produced through the extrusion process should be subject to an 18% tax rate, and the notices from the Directorate General of GST Intelligence (DGGI) were issued in accordance with this clarification.
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Nevertheless, the FMCG industry highlighted that certain items like namkeen, fruit-based alcoholic and non-alcoholic beverages, flavored milk, and other processed food items face overlapping classification issues, often resulting in varying advance rulings across different states.
“Traditionally bhujia is taxed at 12% GST but now most of the manufacturers are using extrusion method to reduce fat content. This creates a grey area and many traditional bhujia makers now facing additional tax demand,” said a namkeen manufacturer, who did not wish to be identified. In the absence of a definition, the industry asked for clarity from the government, especially after many firms received DGGI notices.
Ahead of the approaching deadline, the FMCG industry made a detailed representation to the finance ministry and sought a resolution to avoid unnecessary litigation and notices.
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