The GST Council in its 45th meeting held in Lucknow has given a new dimension to the entire debate on what should be the tax rate for fruit-based or fruit juice-based drinks.
The classification of fruit-based or fruit juice-based drinks have always been the issue of investigation by the tax authorities. The classification of such beverages under GST tariff is primarily dependent on the composition of the product. In the absence of any clear parameters prescribed under the GST Tariff to determine the classification based on the composition, reference was being made to the FSSAI regulations relied upon by various court’s rulings passed in pre-GST era.
As per these regulations, in case the drink contains fruit content > 10% (5% in case of lemon) then such drink is to be considered as fruit based beverages and to be classified under Chapter Heading 2202 99 20 taxable @ 12%.
However, if the drink contains fruit content < 5 % then the same is likely to get classified under Chapter Heading 2202 10 as water-based drink with flavoring attracting GST @ 28% plus compensation cess @ 12%. With respect to the drinks having fruit content >5% but < 10% the ambiguity continued to prevail.
Based on parameters laid down by the recent FSSAI regulation, some players contended that these drinks are not water and, hence will not qualify for Chapter Heading 2202 itself so the question of these being classified under Chapter Heading 2202 10 20 or 2202 10 90 won’t arise. Moreover, in the absence of any other specific entry, such drinks are at best capable of being classified under residuary entry- “Other nonalcoholic beverages” attracting 18% GST.
Resultantly, most of the taxpayers have been classifying their products under Chapter Heading 2202 91, 2202 99 20 0r 2202 99 90 and discharging GST on the either @ 12% or 18% based on their composition. However, the department has been consistently contending that the correct classification of such products shall be Chapter Heading 2202 10 20 or 2202 10 90 which will attract GST @28% plus 12% compensation cess.
Both the taxpayers and tax authorities never came to consensus on this issue and hence tax authorities started issuing notices to the taxpayers demanding GST @ 28% plus Compensation Cess @12% classifying these drinks as aerated waters under Chapter Heading 2202 10 20 or 2202 10 90.
To corroborate their view tax authorities started conducting in-depth investigation and taking samples of the beverages for testing the same to identify the composition of the beverages. The tax officials even went to the extent of diving deep into the books of accounts to examine the raw materials being used to manufacture such beverages so as to quantify the amount of fruit pulp or fruit juice purchased for preparation of these non-alcoholic beverages to determine the correct classification of beverages produced by the companies.
Outcome of 45th GST Council Meeting
GST Council in its 45th meeting held in Lucknow has given a new dimension to the whole feud. Amidst various rate changes, the council has announced that the “Carbonated fruit beverages of fruit drink” and “Carbonated beverages with fruit juice” will be subject to GST @ 28% with additional 12% of compensation cess.
The impact of this amendment is going to affect the beverage industry at large. With this change, the guidelines laid down by FSSAI regulations may lose their relevance to some extent as the percentage of content of fruit juice or fruit pulp in a beverage will no more be the sole determining factor for classification of carbonated drinks. Now what remains of relevance is the fact, if a drink is carbonated and contains any percentage of fruit juice or fruit pulp content, it will be classified under higher rate of GST@28% and will also attract compensation cess @12%.
Previously, various advance ruling authorities held that these drinks are nothing but a flavoured water and thus their classification should be done under Chapter Heading 2202 10 20 or 2020 10 90 with corresponding applicable GST rate to be 40% (28% plus 12% cess). However, the view taken by these authorities was contrary to the settled jurisprudence on the issue which held these products will not qualify as aerated water if they had some prescribed percentage of fruit juice which made it more than a flavoring agent and hence didn’t hold much water.
In order to put rest to the dispute on classification of carbonated fruit juice based drinks within the existing entries under GST tariff, the above amendment has been introduced by way of inserting a new entry under GST tariff to specifically cover fruit juice based carbonated drinks under 28% tax net.
From this, it appears that the above amendment seems to have been made to accommodate the view taken by various advance ruling authorities under GST on the subject matter to tax such beverages @40%.
With the continuing conundrum, the companies dealing in carbonated fruit juice based drinks will now again have to revisit the properties of the drinks made by them and determine their classification under GST with the new entry being introduced under GST tariff.
It is worth mentioning that while the press release has covered this amendment under the category of clarifications, since it is proposed to be specifically prescribed under the GST rate schedule, such amendment would either be brought by way of introduction of a new entry or by amending existing entry under GST rate schedule. Hence, the same may not be treated as mere clarificatory in nature. In such a situation, it may be contended by the taxpayers that such beverages didn’t find mention under existing Chapter Heading 2202 10 20 or 2202 10 90 which attracted GST@28% and hence the amendment has been made specifically to bring them under the higher tax net.
The relevant notification notifying the above amendment and its effective date is still awaited.
Geetika Shrivastava is Executive Partner, Tattvam Advisors.