GST Reset: Classification Disputes May Ease, But Not Vanish

The GST Council's decision to streamline India's indirect tax regime is expected to reduce disputes over the classification of goods and services, offering relief to both industry and consumers.

The number of rate slabs has been cut from four to two (5% and 18%), with a 40% levy reserved for sin goods. While the lower rates will ease the burden on consumers , some experts Mint spoke with said the rate rationalisation will not eliminate classification disputes entirely.

Tax professionals and legal practitioners said removing goods and services tax (GST) slabs of 12% and 28% could curb litigation, which has historically arisen from ambiguous classifications between closely related goods and services. However, grey areas will persist, particularly due to product innovations, which are likely to continue fueling legal disputes.

For instance, in restaurants, plain bread or parathas remain untaxed or taxed at the basic rate, but adding a topping such as cheese-taxed at 5%-could change the applicable GST.

“Decisions taken by the GST Council yesterday are expected to reduce disputes because the number of rates has come down, and the probability of the industry applying an incorrect rate, either knowingly or unknowingly, has ceased to exist," said S.R. Patnaik, partner (head-taxation) at Cyril Amarchand Mangaldas.

With fewer rates, grey areas reduce and compliance becomes smoother, said Sandeep Sehgal, partner, tax, at AKM Global.“While some transitional challenges are inevitable, in the medium to long run, this change should meaningfully reduce litigation and make GST more predictable."

Past disputes illustrate the complexity. In Kerala, courts were asked to determine whether parathas should be taxed like rotis; coconut oil sparked debates over whether it should attract 5% GST as edible oil or 18% as hair oil; and popcorn has faced rates ranging from 5% to 18%, depending on interpretation.

Other contentious items included flavoured milk, paneer analogues, high-end monitors, bread and pizza bases, fertilizers, insecticides, and computer components.

These disputes can drag on for years, moving from the Authority for Advance Rulings (AAR) to tribunals, high courts, and the Supreme Court, straining India's already congested judicial system.

The stakes are high. Finance minister Nirmala Sitharaman told Parliament in December 2024 that tax revenue locked in litigation for direct taxes totalled ₹11.83 trillion, with over 71,453 cases pending across courts and tribunals as of 31 December 2024.

Tax experts say GST classification disputes affect both businesses and consumers. Frequent changes in tax rates and unclear product categories create price confusion, while small businesses face higher compliance costs and blocked tax credits, often paying extra taxes rather than pursuing lengthy court battles-costs that are ultimately passed on to consumers.

While the simplification is expected to reduce litigation, experts caution that disputes will not disappear entirely and going to some fresh challenges.

“The new rate simplification will reduce the number of slabs from four to two, which is likely to lower the number of classification disputes. But it will not eliminate them. Interpretational issues and product innovations may still give rise to disagreements," said Darshan Bora, partner at Economic Laws Practice.

Unless product definitions are made more market-oriented and HSN codes clarified, classification disputes will persist-particularly in sectors governed by technical specifications, said Ankit Jain, partner at Ved Jain & Associates.

He added that the new slabs bring fresh challenges: in the short term, anti-profiteering investigations may require businesses to demonstrate that lower GST rates are passed on to consumers, especially in FMCG, personal care, and retail.

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