Threatening to bring back restricted goods category for items classified in others is akin to tax terrorism
By Sandeep Sachdeva & Shankar Rochlani
Classification of goods has always been a matter of dispute between taxpayers and the customs department. While the department intends to classify goods on a basis that yields highest collection, taxpayers seek to classify them on the opposite principle, i.e., in a way that results in lowest tax outgo. Such disputes are not confined to India, rather they are a worldwide phenomenon.
In order to achieve uniformity in classification of the goods in cross-border transactions, World Customs Organisation (WCO) developed the Harmonised System of Nomenclature (HSN). HSN is an internationally standardised system which codifies goods in XXI Sections and 98 Chapters. The goods are classified at a 6-digit level, and the member countries are permitted to sub-divide the HSN beyond 6-digits as per their needs. Section notes, and chapter notes are also incorporated in HSN for proper understanding and classification of goods under various headings and sub-headings.
India is a member of WCO and has adopted 8-digit level classification, whereas the United States follows classification at the 10-digit level. While the endeavour is to provide specific classification of all the goods, flexibility has been provided to classify the goods which are not covered specifically in the tariff items to be classified as ‘Others’. The goods are classified in ‘Others’ category by applying General Rules of Interpretation and respective section notes and chapter notes. The ‘Others’ category is, therefore, residual in nature.
Of late, the Director General of Foreign Trade has issued various trade notices objecting to the classification of goods under ‘Others’ category. The trade notices advise taxpayers to use the said category carefully, and if the importers continue to mis-classify the goods, the government may bring in a licensing regime for all items imported under the ‘Others’ category by shifting such items from the ‘free’ to the ‘restricted’ category. The notices have instructed the members of trade and industry to file representation latest by February 16, if the existing tariff headings are not sufficient to cover the imported goods. Seriousness of this issue can also be gauged from the fact that the Union minister of commerce & industry, Piyush Goyal has echoed the said message this in one of his interviews. “We have a big problem in our imports in the category called ‘others’… In that ‘others’ category, all sorts of stuff is being put in and imported into the country,” he said.
Thus, the government is micro-scoping the usage of residual entry in cross-border transactions. It is pertinent to note that industry has been classifying goods under ‘Others’ category for a long time. In fact, the department has been using ‘Others’ often in various tax disputes. For instance, the department has been trying to classify most of goods used in the automobile under ‘Others’ category of CTH 87.08, even though the goods are specifically covered under other tariff headings.
In such a scenario, the industry is likely to face another challenge in days to come. Unlike the developed countries, in India, there is hardly any advance ruling mechanism under Customs to provide timely and necessary solutions. Though on record there exists an Advance Ruling Authority for customs, it is not
functional most of the times. Therefore, the industry cannot rely upon this mechanism to get its classification re-validated from government sources.
It is possible that the government may have some reason to question the classification under ‘others’, however, such an action may put the genuine assessee in a vicious circle of litigation. Moreover, threatening to shift the goods from ‘free’ to ‘restricted’ category, clearly shows the intent of the government to bring back ‘Licence Raj’—certainly not aligned with the commitment of ‘ease of doing business. While the finance minister, Nirmala Sitharaman in her Budget Speech mentioned that there would not be any “tax terrorism”, such provisions are certainly not less than “tax terrorism”.
It is high time for the industry to proactively revisit the classification adopted for its cross-border transactions, re-align the classification wherever required and make suitable representation before the government within the specific time limit to avoid any future litigation.
Sachdeva is Partner & Rochlani is Principal Associate, Lakshmikumaran & Sridharan, Attorneys. Views are personal