Under GST, tax is to be levied on the taxable value of the goods and/ or services in percentage and at certain rates. This is called ad valorem tax. Ad valorern is a Latin word, which means “according to value’ It is a method of tax calculation based on the value of a transaction or supply. Ad valorem tax rate is not new. It has already been used under Central Excise, VAT and other taxes.
Rates of GST have already been specified in 5 slabs i.e. 0%, 5%, 12%, 18% and 28%. Cesses are also to be levied at certain rates against notified goods and/or services. The rate of tax as prescribed under the slabs are to be assigned carefully with the class of the commodities and services so that the very purpose of social obligation and aim of the equitable tax structure may be achieved. For this purpose a Fitment committee has been constituted by the Govt. to fix the votes of different goods and services.
Since the votes are assigned against each commodity services identifiable through the unique classification code, it has become necessary to utilize the scheme of classification of goods and services under GST law. The Central Board of Excise and Customs had already adopted Central Excise Tariff Act, 1985 and Customs Tariff Act, 1975 long back, which are based on International Harmonized System of Nomenclature. However, States’ VAT have been using different schemes of commodity classifications, which are based on their local parameters.
Since GST has a federal structure of taxation, it requires to adopt the standard framework of classification across Centre and States. Accordingly, Harmonized System of Nomenclature (HSN), which is utilized by the Central Board of Excise and Customs is to be utilized for classification of Goods.
Since service are classified presently as per the service Accounting Codes which is not a scientific way of classification, efforts have been made to accommodate service classification under Chapter 99 of IT (HS) based on UNCPC, which may provide as effective framework of classification.
Still some issues related to classification remain unsettled. Under GST, there are supplies of intangible assets like sale of Scrips issues by GSFT, Sale of Trade Mark, and Copyright etc. Such assets are neither classifiable under commodity being intangible in nature, nor under services, because entitle and right to use both are being sold. If right to use is transferred, it may be treated as service. But where right to use and entitlement both are sold, it is basically supply of intangible assets. Classification of such transactions are also required to be incorporated under NPCS.
However, as was the practice under service tax the Service Accounting Codes (SAC) have been presently utilized for Enrolment module of the taxpayers. It is policy issue which may be decided by the GST Council whether NPCS will be used for classification of Services and supply of intangible assets or not.
Since, state authorities have been utilizing different method of classification of goods, it is difficult for the VAT dealers to understand as to how their product may be classified under HSN classification scheme. Here, efforts have been made to develop understanding of classification metrics and the methods so that the readers may be enabled to classify goods appropriately under suitable headings.