GST on Toys: Ambiguity and Solutions through Advance Ruling

Introduction

As per section 9(1) of the CGST Act, 2017 it was the responsibility of the Central Government to publish and notify the GST rates as applicable to different categories of goods and services. In furtherance of the same after a recommendation from the GST Council, the Ministry of Finance vide Notification No. 1/2017-Central Tax (Rates)[1] dated 28^th June 2017 notified the tax rate by categorizing the goods into various schedules. As per the Notification-

1. The goods in Schedule-1 are taxed at 2.5% i.e., 2.5% CGST and 2.5% SGST which amounts to 5% GST.
2. The goods in Schedule-2 are taxed at 6% i.e., 6% CGST and 6% SGST which amounts to 12% GST
3. The goods in Schedule-3 are taxed at 9% i.e., 9% CGST and 9% SGST which amounts to 18 % GST .
4. The goods in Schedule-4 are Taxed at 14% i.e., 14% CGST and 14% SGST which amounts to 28% GST

This categorization of goods was based on the mechanism called “Harmonized System of Nomenclature” popularly known as HSN Codes. These codes are 6-digit numbers which are universally accepted by the World Customs Organisation and the same code is used by the Customs Tariff Act, 1975. Therefore, by using the same codes for categorizing the goods for the purpose of application of GST, it was made clear by the GST Council and the Central Government itself that “in order to determine the rate of applicable GST it is paramount to determine the classification of the product under Customs Tariff Act, 1975[2]”

As per the Notification of the Central Government and the updated details from the web portal of CBITC, the list of various toys, their categories and the GST rate applicable on them are enumerated below in tabular[3] format-  

Category Ambiguity and Concept of Advance Ruling.

From the above-mentioned contents of the notification and updated information on the web portal of CBITC, it is apparent that these categorizations are not a part of the CGST Act, 2017 itself but are informed to all the registered persons through notification. Further, there is no definition provided for these goods nor any reasons are provided as to why such goods are placed under such categories. Hence, raising a large area for future confusion and litigations. Any person who is involved or is thinking of starting a toy business can seek an Advance Ruling as per sections 97 and 98 of the CGST Act, 2019. There have been many instances where Toy Suppliers and Manufacturers approached the Authority for Advance Ruling and National Appellate Authority for Advance Ruling to seek clarification of the GST Rate applicable to specific toys.   

When an applicant engaged in the business of manufacturing and supply of toys made of plastic and/or rubber or both wherein essentially plastic was the main component. The applicant contented that the toys manufactured and supplied by him are squarely covered under the S.N. 228, Chapter/Heading/ Sub-Heading/Tariff 9503, Description- toys like tricycles, scooters, pedal cars etc. (including parts and accessories thereof) [other than electronic toys] and he is liable to pay 6% i.e., 6% CGST and 6% SGST which amounts to 12% GST. The Advance Ruling Authority Gujrat[4], gave the ruling in favour of the applicant.

But considerable issues rose in the matter of Nabharat Imports[5], where Tamil Nadu State Appellate Authority discussed that “when physical force is primary action of a toy and lights, and music are ancillary to it whether it will be classified as electronic toys or non-electronic toys.” The appellant had contended that as there is no statutory definition of electronic toys provided therefore a popular meaning/common parlance understanding must be adopted in this respect, and that is when there are two functions in a toy and if the primary function is made through electronic mode, then such toys would constitute electronic toys. If in case such toys are bought and used by physical force and sound/light feature are just ancillary, then such toys cannot be considered electronic toys. After discussing the issue at length and considering the contention of the Applicant. The AAAR ruled against the applicant by stating that-

“In general understanding, a toy which is primarily operated by use of manual force is required to be manually pushed is considered a non-electronic toy and toys operated by use of electricity or power generated from the batteries, weather chargeable or replaceable are considered as an electronic toy. But the fact remains that the toys are equipped with such electronic circuit irrespective of the fact that they are for other functions. As it is evident from the entries in the Notification both the Sl. 228 of Schedule-2 and Sl. 440 of Schedule-3 are same the only difference between them is the term “electronic” Had the parliament thought that electronic toys are a different toy it would not add them in the same list as tri-cycles,, scooters etc. (including parts and accessories) thereof. The only difference being that if any component of electronic is added to a toy it  would disentitle it to fall under the Sl. 228 of Schedule-2 (non-electronic toys).

As in this case an electronic component i.e. sound/music were part of the toys manufactured/supplied by the applicant they are entitled to be taxed at 9% i.e., 9% CGST and 9% SGST which amounts to 18 % GST.

Further, the Maharashtra Authority for Advance Ruling[6] had decided on the question that “what is the appropriate classification and rate of GST applicable on supply of “Modeling Dough”. Wherein they held that Modeling Dough will be covered under chapter 35 i.e. 3407 Schgedule-3 and will be taxed at 9% i.e., 9% CGST and 9% SGST which amounts to 18 % GST.

How to Seek Advance Ruling?

Any applicant desirous of seeking an Advance Ruling can make an application under section 97 on the GST portal itself in FORM GST ARA-01 and it must be accompanied by a fee of 5,000/-[7]The Advance Ruling can be sought in respect of –

1. Classification of any good or services or both
2. Applicability of a notification issued under the provision of this act.
3. Determination of time and value of supply of goods and services or both
4. Admissibility of input tax credit paid or deemed have ben paid
5. Whether applicant is required to be registered or not.
6. Whether anything done by the applicant with respect to any goods or service or both amounts to or results in a supply of goods or services or both within the meaning of that term[8].

After the receipt of such application, the Authority calls upon all the relevant records. After examining the relevant records and the contents of such application may admit or reject the said application. It must be noted that the Authority shall not admit the application where the question raised is already pending or decided in any proceeding in the case of applicant under any provision of the CGST Act,2017. Further, the Authority cannot reject the application without providing the opportunity of being heard. Also, if any application is rejected the Authority must reason for rejection must be provided in written within such order.

The said proceedings are time bound and as per section 98(6) the Authority shall pronounce its advance ruling in writing within 90 days from the date of receipt of application. In case the applicant is not satisfied by the order of the Authority he can file an appeal under section 98(6) in FORM GST ARA-02 within 30 days from the date of rulingwhich must be accompanied by Rs. 10,000/- In case the “concerned officer” or a “jurisdictional officer” wants to file an appeal against an Advance Ruling they may do so by filing the FORM GST ARA-03 and no fee shall be payable by them.

In case there are conflicting Advance Ruling by Appellate Authority of two or more states or union territories or when any Commissioner or distinct person is aggrieved by such Advance Ruling, he can file an appeal with the National Appellate Authority within 30 days from date of the Appellate Ruling.

Applicability of Advance Ruling

The Advance Ruling pronounced by the Authority and the Appellate Authority is binging on the applicant who sought the ruling and the concerned officer or jurisdictional officer in respect to that applicant[9] Further, the ruling of the National Appellate Authority are binding on the applicants, the distinct person who had sought the ruling and all registered persons having the same PAN issued under IT Act, 1961[10].  Any person seeking Advance Ruling must remember that, if any of the following i.e. Authority, Appellate Authority and the National Appellate Authority finds that advance ruling pronounced by them was obtained by fraud, suppression of material facts or misrepresentation of facts then it may declare such order void ab initio. But such action can be taken only after providing an opportunity of being heard to the Applicant or Appellant[11].

Conclusion

From the above-mentioned material, it could be seen that any person who is engaged or is willing to set up any manufacturing or supply of toys of any kind may first check the GST rates applicable on such toys and should seek Advance Ruling on the issue if needed.