Classification under GST

Classification is the process by which the correct HSN/SAC of the product/service is arrived at and thus the correct GST rate is determined.  Classification is important in GST due to various reasons.

• If you wrongly classify a goods/service to a tariff item which has a lower tax rate (eg. you classify an 18% goods/service to 12% or 5% or exempted), you will be forced to pay the difference with interest and penalty. Even if you recover the GST from your buyer, he will not get the credit of this GST, in certain cases. 

• If you classify something to a higher rate, then also, you will be forced to pay the excess collection to the government and at the same time, your buyer will be asked to reverse the wrong credit he has taken based on your invoice. He will be liable for interest and penalty also.

• Similarly, if you claim Input Credit based on an invoice you received with a wrong GST, then you will be forced to reverse the excess ITC claimed, with interest and penalty. So it is very important to check whether the GST charged by your supplier is correct or not.

• If you are a reseller, charging a wrong GST based on the GST charged by your supplier will not absolve you from the penalties of wrong classification.

• Further, you may be denied the duty drawback/other export incentives, if you wrongly classify your goods/services.

• Loss of orders, Loss of credibility with customers, Extra cost of re-establishing business with the new/old customers, Unavoidable loss on account of discounts given to customers etc are other indirect damages you will have to suffer.

Classification is a complex procedure based on Customs Tariff, various GST rate and exemption notifications and various rules of interpretation established under Customs Tariff and decided cases. It is not a simple job.

Never decide on a classification based on google search or your supplier’s invoice. There can be subtle differences in the nature of goods/services which may change the GST rate of those goods and services.

Classification is area which needs extreme expertise and always take the help of a professional to avoid loss and damages in future.

Good day to you!