There are mistakes in GST which impact business and there are mistakes which can close down the business. In this article we restrict to classification mistakes. 90% of classification would be routine and there maybe no mistakes. However in 10% cases if exemption claimed incorrectly or lower rate chosen instead of higher rate, there maybe some serious consequences. Demands may be raised after a few years which would include the differential tax + interest + penalty.
Cost of mistakes in GST classification would include the following:
1. In case of higher tax charged, assessee may have to suffer the loss of orders and cost of re- establishing with the customers, the loss of credibility with customers. The cost of discounts is not factored originally which one is forced to give to retain the customer.
2. In case of goods or services supplied which are nil rated or exempted the denial of credit by the revenue up to 5 years can be fatal for the business.
3. Demands for the same goods can be made at multiple stages is a major departure from the earlier regime.
4. In case of short charge due to incorrect classification or claim of exemption which is not available, would result in non- recoverability of taxes from the customers and cost of interest. In business, breaking the credit chain could make business unviable.
5. Valuation methods prescribed for certain categories of goods and or services would be dependent on the classification of such goods and/or services. Wrong classification would lead to wrong payment of tax.
6. On certain goods and/or services GST is to be discharged by the recipient of supply under reverse charge mechanism. Wrong classification may result in non- payment of tax or un- necessary payment of tax.
7. Denial of benefits under FTP such as duty drawback and incentives being provided for various goods and/or services at varied rates can be the result.
8. Non- payment of compensation Cess, if any, applicable on specified goods and or services which may result in penal proceedings
9. Getting the liability on Import of goods/Services all wrong or not claiming the ITC (Input Tax Credit) benefit of export on goods/service exports due to improper classification could also happen. This could happen when the alternative headings available have different import/export criterion being applicable to them. In case of revenue raising the short charge or ineligible exemption issues, in addition to the above costs: the cost of penalty, denial of credit availed, cost of dispute resolution at adjudication, appeal, Court stages also would arise. It should be kept in mind that the internal manpower resources could get substantially involved to resolve the issue inspite of the fact that a specialist in GST may be outsourced to prepare the reply, appearance etc. Refer to good article on classification or a good commentary.
For 2018- 19 use updated Tariff as there have been many changes. Steps in Classification of Goods- GST GST for goods has provided schedules in line with VAT but the principles are based on the customs classification (also adopted in central excise) The need to classify properly is understood by all as it may lead to payment of differential tax with credit in case of self correction and maybe without credit otherwise. Also no credit is available beyond limitation period for ITC post the annual returns. Further if payment has been made invoking longer period then also no credit for the customer. We have made an attempt to share the possible steps to be followed to arrive at appropriate heading.
Preliminary Step: Understand the global scenario and then the Indian scenario of that business or activity, the alternative methods or variants, the domain knowledge of the transaction, Whether the GST paid is available as ITC and the customer profile. A brief study including web search for images.
The further steps involved are:
1. The first step is identify whether the transaction ( especially if it has many components) is one of goods or services confirming with the Schedule II which deems certain transactions to be goods and certain services. Further also confirm that it is neither a goods or a services. If it is goods then as under.
2. Further to find out the classification heading based on the description and nature of the goods being supplied as per the notified rate schedule. Confirm that the product is also similarly or more specifically covered in the Customs Tariff and HSN 2017. The Section Notes and Chapter Notes to the Schedule to be read.
3. If there is no ambiguity, the classification is final and there is no need to apply the non- statutory principles of classifications set out in commentary section above.
4. If there is ambiguity, first reference shall be made to the Rules for interpretation of the Customs Tariff. Find the trade understanding of the terms used in the Schedule, if the meaning is not clear. If the trade understanding is not available, the next step is to refer to the technical or scientific meaning of the term. If the tariff headings have technical or scientific meanings, then that has to be ascertained first before the test of trade understanding. If none of the above are available reference may be had to the dictionary meaning or ISI specifications. Evidence may be gathered on end use or predominant use.
5. In case of the unfinished or incomplete goods, ascertain if the unfinished product has the essential characteristics of the finished product, if yes, apply that classification to the unfinished product.
6. If the classification is not ascertained as per point (e) mentioned above, find out the heading, which is more specific to the nature of product. This is a very important rule.
7. If the classification is still elusive, ascertain which material gives the article its essential characteristics and use that classification.
8. While doing so, consideration as to the following non- statutory principles can also applied for classification, however it should be understood that statutory principles shall have precedence over non- statutory principles.
9. Find the trade understanding of the terms if the meaning is not clear.
10. If the trade understanding is not available, the next step is to refer to the technical or scientific meaning. However if the tariff headings have technical or scientific meanings, then that has to be ascertained first before the test of trade understanding. If none of the above is available, reference may be made to the dictionary meaning or ISI specifications. Evidence may be gathered on end use or predominant use.
11. Once the goods are appropriately classified, then examine whether any exemption or concessional notification exists. Here care is to be taken to ensure conditions if any are complied with/compliable in full or substantially.
12. It is suggested to classify and to declare all the goods supplied including by- products, intermediate products, stock transfers, job work, waste and scrap, if any generated during the manufacturing process. (Exempted items are also to be declared as an additional disclosure as a measure of caution)
13. The supplier should as far as possible, provide the description of the goods as it is to be invoiced or as it is understood in the market (including brand name, if any). It would be advisable to enclose trade literature. The HSN description need not be reproduced.
For example, the spindle assembly is basically a part of wiper for cars. Instead of declaring the same as 'Parts of Wiper', declare the same as 'Spindle Assembly for Wipers of Cars.� Step by Step Classification of Service Understand the service generally anywhere in the world and India. Need to know the variants by using the massive authenticated information on the internet. Understand what the receiver wants, confirm from the terms of agreement, work order, statement of work, master service agreement.
The following steps may be followed while classifying the services;
1. The first step is identify whether the transaction (especially if it has many components) is one of goods or services confirming with the Schedule II which deems certain transactions to be goods and certain services. Further also confirm that it is neither a goods or a services. If it is goods then as under.
2. Confirm whether supply is a composite supply.
3. In case of composite supply, identify the principal supply and decide whether it is supply of goods or supply of service, then see the relevant notification for classification
4. Verify whether it is a mixed supply. Identify the different supplies in the mixed supply and see the classification for all the supplies involved in order to determine the highest rate applicable.
5. Next is to find out the classification heading based on the description and nature of the service being supplied as per the notified rate schedule.
6. Refer the exemption Notification No. 12/2017- Cental Tax (Rate), dated 28.06.2017, to decide whether a particular service is exempt or not. The classification under HSN is irrelevant in deciding the exemption since the exemption is based on the description of the service and not on the basis of classification under HSN. Nonetheless, the classification of exempt service is required to mention in the invoice, returns and records.
7. Reference may be made to Service Accounting Code (SAC) published by the CBEC for better understanding of the coverage of each heading. Since the SAC contains more detailed sub- headings in each chapter heading, will give more clarity for classification.
8. The rules of interpretation remain the same wherever relevant. Errors can be corrected at the stage of Subsequent Returns, Annual Returns or GST Audit as Under:
� Use a good GST Tariff publication which provides the intermittent changes for the relevant period.
� Understand exemptions by referring to some good books on the topic.
The website of the ICAI- Indirect tax committee can provide some specialized publication in this regard.
� Errors in 3B or GSTR- 1- rectify in subsequent months returns as soon as possible.
� AR- Form 9- If error noticed- rectify in 3b & 1 and then complete AR. If this cannot be done then report mistaken classification itself.
� Sl. No 17/18 HSN: Summary Outward in proper classification maybe critical. Summary of Inward may not be possible even for a large enterprise;
� Professional to be aware of the possibility of detection Risk due to many changes as well as applicable date of notification. If knows then it is prospective.
� Impact of Advance Ruling which are not very reliable and some maybe taken to higher forums. Careful when relying on them.
� 9C- Table 7d- Tax is to be paid on RCM; Table 9 Rate wise (maybe differential rate will be specified);
� Table 10- Reasons could be mistake in understanding, knowledgeable person not available at the time of dispatch when billed..
� Table 11- Paid rate wise ( again differential rate column maybe inserted in due course of time)
� In Table 9 classification needs to be changed. If client agreeable & make changes in report in para 4. If not willing auditor would have provide the observation/ qualifications unless impact is immaterial. In various seminar across India- find that the mistakes in classification and GST has not passed onto the customer is a thorny issue.
The maximum damage in in quoting for tenders where the taxes are inclusive and not extra. Understanding that the classifications adopted especially for outward supply and RCM is of paramount importance, this note has been penned.
This article has been adapted from the chapter of book- Classification and Exemption published by Bharat Law House.
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