Ambiguities continue to plague ‘new, improved’ GST, too

Immediately after Wintrack Inc, an importing company, declared on October 1 that it was shutting down its business due to alleged bribe demands and harassment by the Chennai Customs officials, the Finance Ministry counter-alleged that, among others, the company was guilty of misclassifying items of import. The ministry also said Wintrack accepted the charge when confronted with “documented facts”, even while it ordered a probe.

The details of this misclassification have not emerged yet but tax experts argue that while firms misclassify items to lower tax burden is known, ambiguities in tax laws on certain items also cause misclassifications.

Also read: Wintrack exit sparks debate on ease of doing business, exposes ranking-reality gap

This is evident in the GST even after the recent rejig, called the “next-gen” reforms after eight years of its rollout.

Huge pendency, delayed GSTAT for eight years

Last month, national dailies reported that 4.83 lakh cases were pending before the GST appellate authorities, which are expected to be filed before the Goods and Services Tax Appellate Tribunal (GSTAT) launched in New Delhi on September 24. The time for filing such appeals has been extended to June 30, 2026.

Of these cases, disputed cases relating to Central GST (CGST) have shot up to 22,000 cases in FY24, from 10,000 in FY22, resulting in the disputed demand going up to Rs 1.14 lakh crore, from Rs 22,000 crore during this period. The number of such disputes was 5,499 in FY21 – the last fiscal for which the data is available.

While it took eight years for the Centre to set the GSTAT, “none” of the 31 state benches at 45 locations across the country is yet to be operational – the FinMin said in its reply to the Lok Sabha on July 21. This eight-year delay, the ministry explained, was due to litigation over the constitution of tribunals which had led to several amendments in the GST law in 2024 and also “around 30 laws to rationalise existing tribunals and bring uniformity in conditions of service”.

Also read: Govt orders inquiry into Wintrack's allegations of 'harassment' by Chennai Customs

In short, there was no homework before the GST was rolled out in 2017.

Even now – after the September 3 rejig – the ambiguities in GST persist, a potential cause for misclassifications.

Ambiguities and scope for misclassification in 'next-gen' GST

On October 4, the All India Isabgol Processors Association (IPA) threatened to stop buying isabgol – a fibre used as a thickening agent in drinks, bakery, atta and soups – because of ambiguity in GST rates that has locked up their Rs 3,500 crore. On top of it, they are facing the US tariff heat. The US accounts for 60-70 per cent of India’s total isabgol exports.

At the heart of the problem is what constitutes “fresh” isabgol and “dry” isabgol (since 2017). “Fresh” isabgol is tax-free, while “dry” isabgol attracts 5 per cent GST. The IPA says the industry is paying 5 per cent GST on isabgol seeds “to avoid being questioned” by the GST authorities.

Also read: How Centre flouted GST law, diverted Rs 3.1 lakh crore meant for states

The processors separate the husk from isabgol seeds and sell to food and pharma companies – the husk is sold as cattle feed, which attracts zero GST.

A few days ago, an importer (imports attract GST) flagged another such ambiguity: Two different GST rates for the goods identified as HSN-4082 (four-digit harmonised system of nomenclature) – zero and 18 per cent:

• “4802: Uncoated paper and paperboard used for exercise book, graph book, laboratory notebook and notebooks.” The GST was cut down from 12 per cent to zero.

• “4802: Uncoated paper and paperboard, of a kind used for writing, printing or other graphic purposes, and non-perforated punch-cards and punch tape paper, in rolls or rectangular (including square) sheets, of any size, other than paper of heading 4801 or 4803; [other than Uncoated paper and paperboard for exercise book, graph book, laboratory notebook and notebooks].” The GST was hiked from 12 to 18 per cent.

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This is one part of the problem. The other is, as The Federal had pointed out earlier, the GST on pulped wood and most other forms of wood has been lowered to 5 per cent, but on pencils it is reduced to zero, denying pencil manufacturers to claim input tax credit (ITC).

Difficulties relating to ITC (after the GST rejig) are impacting many industries. Insurance is tax-free but not the service inputs; auto dealers have locked up Rs 2,500 crore in higher GST while accepting deliveries from the manufacturers (OEM) and don’t know how to recover – after the GST was lowered for two-wheelers and cars across the board. Corrections in inverted structure in agriculture, fertiliser and textile have also caused similar problems.

The ambiguities leading to misclassification are more in the services sector.

Services sector more vulnerable to GST misclassifications

The rejigged GST rates show multiple categories and multiple rates under the same HSN services without clarity – making the system very complex. A few examples.

Also read: PM Modi pitches for ‘swadeshi’ goods, hails GST reforms as 'savings festival'

HSN-9965 service has four categories and several tax rates in each case:

(i) Supply of transport of goods by GTA (goods transport agency): There are two rates: 5 per cent without ITC (unchanged) and 18 per cent with ITC (up from 12 per cent). The first is distinguished from the second with “RCM/FCM” in parenthesis. If marked RCM (Reverse Charge Mechanism), it means the service recipient (customer, not the GTA) is responsible to pay the GST. If marked FCM (Forward Charge Mechanism), it means the service provider (GTA) will pay the GST. How does one distinguish if a service is marked “RCM/FCM”? Further, what is the logic for 18 per cent GST with ITC for the second category is not clear.

(ii) Supply of transport of goods in containers by rail by any person other than Indian Railways: It has two rates: 5 per cent without ITC and 18 per cent with ITC. Why this distinction has not been explained.

(iii) Supply of transportation of natural gas, petroleum crude, motor spirit, high speed diesel or ATF through pipeline: 5 per cent without ITC and 18 per cent with ITC. There is no differentiator.

(iv) Supply of multimodal transport of goods within India: 5 per cent “where no leg of transport is through air, with restricted ITC” and 18 per cent with ITC. The language is too complex to make sense.

HSN-9966 service has two categories with different tax rates:

(i) Supply of renting of any motor vehicle (with operator) designed to carry passengers where the cost of fuel is included in consideration: 5 per cent with ITC and 18 per cent without ITC. The first tax slab is meant for services “in the same line of business”.

(ii) Supply of renting of goods carriage (with operator) where fuel cost is included in consideration: 5 per cent with ITC and 18 per cent without ITC. The first slab is distinguished by “in the same line of business”.

HSN-9968 service has two categories and two tax rates:

(i) Local delivery services: 18 per cent with ITC.

(ii) Supply of local delivery services through Electronic Commerce Operator (ECO): To be notified and charged at 18 per cent.

HSN-9988 service (supply of job work or labour) has six categories: Five are taxed at 5 per cent GST with ITC and the sixth, 18 per cent with ITC.

HSN-9996 service has three categories with different rates: 5 per cent with ITC for admission to film shows; 40 per cent with ITC for admission to casinos, race clubs etc. and 40 per cent without ITC for bookmakers in race clubs.

Worse, more than a month has passed since the GST rejig was announced on September 3. As on October 6, the Central Board of Indirect Tax and Customs (CBIC) hasn’t changed the GST rates on its website.

What do experts think about this state of affairs?

Tax expert Ashwani Taneja says, GST miscalculation is a “grey area” which the GST Council must remove as soon as possible because it “leads to corruption, harassment and disputes”. His solution: First make the duty structures simple and clear and then provide harsh punishments, like a jail term, for those who misuse it.

GST consultant Anil Sharma agrees and says, misclassifications and disputes arise “due to lack of clarity” and the primary responsibility of the policymakers is to clarify things at “micro level”.

The question is: Can one expect simplicity and clarity in the GST structure that has eluded it for eight long years and one “next-gen” reform?