GST Dilemma: Contradictory AAR Rulings regarding GST Rate for Flavoured Milk

The Authorities for Advance Rulings (AAR) of Gujarat, Tamil Nadu, and Andhra Pradesh ruled 12% of GST is applicable on flavoured milk, but the Karnataka AAR goes for 5%.

The Advance Rulings under GST are the written decisions issued by tax authorities against requests from individuals or businesses on specific doubts over proposed or already undertaken supply of goods and services. Authority for Advance Rulings (AAR) is a platform to resolve these doubts.

However, a string of contrasting rulings by its state branches has raised quite a few eyebrows and there are voices now that question the sensibility and maturity of the state-wise structure.

The AAR Rulings and Their Dilemma

· Ruling by Karnataka AAR

The AAR, Karnataka in the matter of M/s Karnataka Co-operative Milk Producers Federation Ltd. held that Flavoured milk is classifiable under the Tariff heading 0402 99 90 which covers “milk and cream, concentrated or containing added sugar or other sweetening matter” and held that the flavoured milk is covered under tariff heading 04029990 and 5% GST is applicable.

Rationale

The AAR observed that the “flavoured milk” is not a water-based drink whereas the tariff heading 2202 deals with water-based beverages and other non-alcoholic beverages. Therefore, it could be inferred that the pre-dominant part of the beverages covered under the heading 2202 is water. In the instant case the predominant constituent is milk and hence the “Flavored Milk” does not merit classification under beverage containing milk, under tariff heading 2202 9930, but merits classification as milk, under tariff heading 0402.

Tariff heading 0402 covers “milk and cream, concentrated or containing added sugar or other sweetening matter”. The instant product ‘flavoured milk’ is covered under ‘milk’. Therefore, the instant product merits classification under tariff heading 0402 99 90.

Further, the AAR has also relied on the High Court of Allahabad in the matter of Gujarat Coop. Milk Marketing Federation Ltd. Vs State of UP wherein it was held that flavoured Milk is a form of Milk. The Court has also specifically observed that flavoured milk is a form of milk as it is neither a derivative of milk nor a milk product.

Karnataka AAAR

The order passed by the Authority for Advance Ruling was declared void ab initio as it was vitiated by the process of suppression of material facts. Therefore, the appellate authority for advance ruling (AAAR) does not intend to give a ruling on the issue of classification since the matter is pending in a proceeding under this Act. Hence the appeal of the Department is allowed.

However, they did not give any ruling in respect of the classification of ‘flavoured milk’.

Ruling by Gujarat, Tamil Nadu, and Andhra Pradesh AAR

The Gujarat, Tamil Nadu, and Andhra Pradesh based Authority for Advance Rulings has said that flavoured milk would attract 12 per cent goods and services tax (GST), a ruling that is contrary to Karnataka AAR’s which set the tax rate at 5 per cent.

It was further ruled that the HS code for flavoured milk is 2202 9930 and the GST rate is 12% (6% CGST and 6% SGST) under entry no. 50 of Schedule II of Notification No.1/2017– Central (Rate) dated June 28, 2017 as amended.

Rationale

The AAR noted that this matter was represented before the GST Council for its meeting on December 12. Companies requested to shift the classification so that rate could be lowered to 5 per cent from 12 per cent. However, the Fitment Committee (the committee of tax officials recommend rate classification which is then considered by the GST Council) did not favour the rate which was accepted by GST Council.

Conclusion

In order to curb the Delima and tussles between the Advanced ruling of different states there is a strict need to constitute a National level Advance ruling authority so as to ensure tax certainty.

The AAR was no doubt set up to minimize business queries and boost transactions. But a lack of consensus on applicable GST rates coupled with ambiguities may force the Government to seek a fresh path to form a National level Advance ruling authority sooner than later.