In India, the importation of goods attracts customs duty under the Customs Act, 1962. The rates at which customs duty is leviable on imported goods are provided for under the First Schedule to the Customs Tariff Act, 1975 (the ‘Customs Tariff’). The rate of customs duty or goods and services tax (GST) applicable to a product depends on the classification of the product under the Customs Tariff.
The Customs Tariff is a schedule comprising 21 sections that categorises products across 98 chapters and levies customs duty at various rates on the products. It is based on the Harmonized System of Nomenclature (HSN), a globally accepted uniform system of naming and categorising objects, products or goods in a given group for tariff purposes that was formulated by the World Customs Organization.
Similarly, the GST Rate Schedules which provide for the levy of, for example, integrated GST or central GST on goods supplied into/in India are also modelled on the lines of the Customs Tariff and the HSN.
While 97 of the 98 chapters of the Customs Tariff are borrowed from and based on the HSN, Chapter 98 of the Customs Tariff (that has been borrowed for GST as well) is a unique creation of India. Precisely for the reason that it is distinctive, the chapter comes with its own set of interpretation challenges. These challenges, if left unaddressed, have the potential to cause unprecedented disruption and disputes for taxpayers.
In this article, the authors will focus on the scope of Heading 9804 of the Customs Tariff (extracted below) and the unintended issues that stem from the same.
9804 | All dutiable goods imported for personal use |
Dutiable goods
The effective rate of customs duty for articles falling under Heading 9804 is 10%. All dutiable goods which are imported for personal use are classifiable under Heading 9804. Furthermore, Note 1 to Chapter 98 states that goods which meet the conditions of the chapter will merit classification under the headings of the chapter even if the goods are specifically covered in any other heading in the schedule by nomenclature.
In the GST Rate Notification, articles falling under Heading 9804 have been taxable at the rate of 28% and the relevant entry reads as under:
227. | 9804 | All dutiable articles intended for personal use |
To understand the scope of the phrase “dutiable goods” under customs law, the provisions of the Customs Act, 1962 shall be analysed. Section 2(14) of the act defines dutiable goods as “any goods which are chargeable to duty and on which duty has not been paid”.
Section 2(15) of the act defines the term ‘duty’ as a duty of customs leviable under the Customs Act, namely the basic customs duty charged under Section 12 of the act.
It can therefore be seen that dutiable goods are goods which are chargeable to duty under Section 12 of the Customs Act and on which such duty has not been paid.
To understand the definition better, reference is made to the decision of the Supreme Court in Associated Cement Companies Ltd. v CC [2001 (128) E.L.T. 21 (S.C.)], wherein the court held that goods cannot be treated as dutiable under Section 2(14) when the First Schedule to the Customs Tariff provides that the importation of a particular item is ‘duty-free’ or is exempt from payment of any duty.
From the decision in Associated Cement Companies, it is evident that if no customs duty is chargeable by reason of the Customs Tariff not providing for it or because of an exemption notification, then such goods must not be treated as dutiable goods under Section 2(14) of the Customs Act.
For further clarity, let us take an example of laptops/desktops falling under Heading 8471. The rate of duty prescribed for laptops/desktops under the Customs Tariff is nil/free. Since no duty is chargeable on these goods, they do not fall within the purview of dutiable goods under Section 2(14). Thus, even if the goods are imported for personal use, they will not merit classification under Heading 9804 as the heading only covers dutiable goods.
On the other hand, if customs duty is prescribed for any goods – say, television – then notwithstanding the actual classification and rate of duty applicable to such goods, the goods will be classifiable under Heading 9804 if they are imported for personal use.
The above discussion on the scope and ambit of Heading 9804 will, mutatis mutandis, apply to removals from Special Economic Zones (SEZ) to the Domestic Tariff Area (DTA), wherein customs duty is payable in terms of Section 30 of the Special Economic Zones Act, 2005. Consequently, if any DTA buyer procures any goods from SEZ for their personal use, then the goods may have to be cleared under Heading 9804.
A potential GST conundrum
We shall now delve into the second question as to how to interpret the GST rate entry “dutiable articles intended for personal use”. Let us take an example of an individual/consumer buying pre-packaged paneer from a grocery shop. Paneer sold in pre-packaged form generally merits classification under Heading 0406 and the GST rate is 5%. However, in the present case, since the pre-packaged paneer is being bought by a consumer for personal use, the goods may merit classification under Heading 9804 with a GST rate of 28% on account of being ‘dutiable’; i.e., leviable to tax under GST.
By virtue of Note 1 to Chapter 98, Heading 9804 enjoys primacy over Heading 0406 and, as such, it is possible to entertain a view that pre-packaged paneer sold for personal consumption would attract GST at 28%.
Thus, the innocuous GST rate entry dealing with Heading 9804 as it is worded at present has the potential to make all B2C sales of goods leviable to GST at 28%. Another interesting conundrum is that even in the case of B2B sales, if the buyer is intending personal consumption or use of goods, as opposed to using the goods in their business, the goods may merit classification under Heading 9804.
Final thoughts
The issues highlighted above are a potential area of dispute between the Department of Revenue and taxpayers and could lead to avoidable litigation.
While one can say the ostensible consequences flowing out of Heading 9804 may have been unintended, the manner in which the rate entry is worded is likely to pose issues to taxpayers. Therefore, it would be ideal for the government to issue a suitable circular to clear the air and avoid any coercive actions from the department.
