An Introduction for Classification of goods and services
Under the Indirect Tax regimes prevalent across the Globe including India, the classification of various items which are the subject matter of tax, be it goods or services, is an essential and integral part of the whole levy and collection mechanism. It is important both from the taxpayer’s perspective and tax collector’s perspective to have a definite class or group under which subject matters of tax can be divided. The primary intention of classifying them is to determine whether or not the same would be encumbered by the levy of these taxes and if so, under which category the tax liability would arise. However, the requirement of classification is not restricted only for understanding the rate of tax on a specific subject matter of tax. The various benefits of classification are as under:
1. Leviability of Tax
Classification of subject matters of tax into various classes identifies the taxable and non-taxable items for determining the scope of leviability of tax through a particular legislation.
2. Goods versus Services
After determining whether a particular subject matter is leviable to tax or not, classification principles further assist in determining if they are taxable as goods or as services. The differentiation between ‘goods’ and ‘services’ not only impacts the rate of tax, but also the time, place and value for the tax.
3. Exemptions
The Government exempts specific categories of items from levy of taxation. Exemption from tax is a policy decision of the Government which finds its base from the classification of items into specific categories which are driven by various socioeconomic factors.
4. Rate of Tax
The Government is assisted by the principles of classification to identify the demerit and merit rates of various categories of items. Such categorization helps the Government to ensure that the burden of taxation is not regressive for the tax payers and also does not negatively affect the revenue collection for the Government.
5. Standardization and avoiding differentiation
Classification also helps the Government to collect data about various trades and industries in a systematic and standardized manner. Further it helps to bring on par various similar and like items sold by different industries and sizes of business to ensure uniformity.
Classification under Goods and Services Tax
Applicable Laws Useful For Classification under GST
The scheme of Goods and Services Tax in India is governed through following laws:
The Central Goods and Services Tax Act, 2017The State Goods and Services Tax Act, 2017The Integrated Goods and Services Tax Act, 2017The Union Territory Goods and Services Tax Act, 2017The Goods and Services Tax (Compensation to States) Act, 2017
Under each law, the charge of tax is on supply which has been defined under Section 7. However the various Governments (Central State or UT) derive power to levy and collect taxes at specified rates under Section 9(1) of the CGST Act 2017, Section 5(1) of the IGST Act 2017 and Section 9(1) of the SGST/UTGST Act 2017.
