Recently, Notification No. 12/2022 – Integrated Tax (Rate) dated 30-12-20221 (Amendment Notification) amended the goods rate notification [Notification No. 1/2017 – Integrated Tax (Rate) dated 28-6-2017]2. A cursory glance at the amendment with respect to carbonated fruit beverages brought by the amendment notification may seem to indicate that a long-standing point of dispute has been put to rest. However, on a closer look, several unanswered questions and open-ended issues still fizz up.
Background prior to the amendment notification
The confusion lies in the question as to whether a carbonated drink (aerated drink) which contains a fruit juice or fruit flavour is to be classified as a “fruit juice based juice-based drink” or as an “aerated drink containing added sugar or other sweetening matter or flavoured”. As per the goods rate notification, GST at the rate of 12% is applicable on fruit juice-based drinks and GST at the rate of 28% (plus 12% cess) is applicable on aerated drinks containing fruit flavour.
This considerable difference in the applicable rate of GST has constantly created a tug-off between the carbonated fruit beverage industry players claiming the same to be classifiable as a fruit juice-based drink attracting a lower rate of tax, and the department raising disputes claiming that the same is to be classified as fruit flavoured aerated drink subject to a higher rate of tax.
To further the confusion, the specifications, or definitions on what characterises as a “fruit juice/drink” as against a “carbonated/aerated beverage with fruit flavour or fruit juice” is nowhere found in the Customs Tariff Act, 1975 HSN explanatory notes or the goods rate notification. The players in the carbonated fruit beverage industry who classified it as a “fruit juice-based drink” relied on Regulation 2.3.30 of the Food Safety and Standards Regulation, 2011 (FSSR) which provided that products shall be called as “carbonated beverage with fruit juice” when the quantity of fruit juice is below 10% but not less than 5% (2.5% in case of lime or lemon).
In an attempt to settle and overcome the abovementioned issues, the GST Council in the 45th GST Council Meeting recommended that “carbonated fruit beverages of fruit drink” and “carbonated beverages with fruit juice” would attract GST at the rate of 28% and cess at the rate of 12%. Accordingly, Notification No. 8/2021 – Integrated Tax (Rate) dated 30-9-20213 inserted a specific entry (Sl. No. 12-B in Schedule IV) in the goods rate notification in respect of goods classifiable as “carbonated beverages of fruit drink or carbonated beverages with fruit juice” under Chapter Tariff Heading 2202 and taxed the same at 28% GST.
However, no clarity was provided regarding the scope of the said entry or the existing entries pertaining to “fruit juice-based drinks”.
It is also key to note that neither was any indication provided for understanding whether the percentage content as prescribed by the FSSR was relevant or whether all carbonated fruit beverages were taxable at 28%. In short, there was a thriving lack of understanding on the characterisation or definition or scope of the beverages that were to be taxed at 28%. Therefore, several unanswered issues and doubts persisted even after a specific entry was inserted to the effect described above.
The amendment notification
It appears that the amendment notification is yet another attempt to settle the issues relating to rate of tax applicable on carbonated fruit beverages. By way of the amendment, the phrase, “fruit pulp or fruit juice based drinks” as provided in S No. 48 of Schedule II has been amended to read as, “fruit pulp or fruit juice based drinks other than carbonated beverages of fruit drink or carbonated beverages with fruit juice”, with effect from 1-1-2023.
Whether the definition in FSSR is a basis for classification?
While the amendment notification has excluded carbonated beverages of fruit drink or with fruit juice from the scope of fruit beverages taxable at 12%, there has still been no clarification to a clear effect on whether all carbonated drinks with fruit juice, irrespective of the percentage of content of fruit juice in the drink, is taxable at 28%.
Therefore, there still lies a vacuum in respect of the definition that is to be considered as a carbonated drink with fruit juice. There has been no reference anywhere for adopting the standards as provided in FSSR for determining the beverages to be taxed at 28% or 12%. Where there has been no reference to the FSSR, the question arises as to whether the consideration of the definition/characterisation/standardisation provided in FSSR can be considered as a basis for determining the rate of GST applicable on carbonated fruit beverages.
The Tribunal in cases such as Brindavan Beverages (P) Ltd. v. CCE4 and Commr. of Customs v. Anutham Exim (P) Ltd.5 had held that the carbonated fruit drinks in dispute (7UP Nimbooz Masala Soda, Minute Maid Nimbu Fresh, Big Lemon, Big Kids Orange, etc.) were correctly classifiable as “fruit pulp or fruit juice-based drink”. In holding so, the Tribunal relied on the judgment of the Supreme Court in Parle Agro (P) Ltd. v. CCT6; wherein the classification of “Appy Fizz”, which was a drink containing apple juice as well as carbonated water, was examined and held that the product was correctly classifiable as fruit pulp or fruit juice-based drink. The Supreme Court in that case had referred to the Regulation 2.3.30 of FSSR and inter alia found that the product Appy Fizz met with the conditions in Clause (2) of the FSSR.
Therefore, while the courts have previously utilised the definition provided in the FSSR to differentiate and achieve clarity among the multiple relevant entries, the fact remains that no guidance has still been provided either in the Customs Tariff Act, HSN explanatory notes, or the goods rate notification to determine the taxability.
The recent Circular (No. 189/01/2023-GST dated 13-1-20227) delves briefly into the applicable six-digit HS code for “carbonated beverages of fruit drink” or “carbonated beverages with fruit juice”. However, the same falls short of providing clarification on the scope, features or applicability of FSSR for determining the beverage.
The change in the goods rate notification by the amendment notification, without providing clarity on the scope or definition, only steepens the doubt on the same.
Impact of amendment on prior sale of carbonated fruit beverages
With the issue of basis of GST rate determination still under a shadow of uncertainty, another connected issue to be addressed is regarding the effect of the current amendment on the prior sales of carbonated fruit beverages (prior to 1-1-2023).
In our view, considering the lack of clarity, the GST discharged at the rate of 12% on carbonated fruit beverages by the industry players prior to the amendment (period between 1-10-2021 to 31-12-2022) should not be disputed. However, where players in the industry have been discharging GST on the same at the rate of 12%, a looming question arises as to whether there is a chance that the department would demand the differential rate of tax since carbonated fruit drinks/juices have been specifically taken outside the ambit of the 12% GST slab. Unfortunately, the department may cite the present amendment to justify the demand of differential rate of tax.
Despite several amendments, considering the issues surrounding the complete lack of clarity based on determining the tax rate for carbonated fruit beverages, it is high time that the Government issues immediate clarification on the definition or scope or standards to be adopted for determining a beverage as a “carbonated drink with fruit juice” or “carbonated beverages of fruit drink”. Further, clarification on the relevance and weightage to be given to the definition in the FSSR is also required to be addressed by considering reliance on the same by courts in earlier cases.
Additionally, clarifications on the impact of the present amendment to transactions made between 1-10-2021 to 31-12-2022 would also go a long way in ensuring that the players in the beverage industry are not left in chaos and confusion.
† Partner, Lakshmikumaran & Sridharan Attorneys.
†† Principal Associate, Lakshmikumaran & Sridharan Attorneys.
††† Associate, Lakshmikumaran & Sridharan Attorneys.
1. Notification No. 12 of 2022- Integrated Tax (Rate) dated 30-12-2022
4. 2018 SCC OnLine CESTAT 11387
5. (2021) 378 ELT 611.
7. Circular (No. 189/01/2023-GST dated 13-1-2022.