Is a salwar/churidar-kurta set comprising three pieces — top, bottom and
dupatta
— just fabric or articles of apparel? This was the question before the
Authority for Advance Ruling of Tamil Nadu (AAR-TN) to determine the
rate of Goods & Services Tax (GST).
AAR-TN ruled that
completely unstitched sets will be classified as ‘fabrics’ and attract
five per cent
GST, just embroidery or embellishment will not make any
difference to it. However, partially stitched will make it ‘Article of
Apparel’ and it will accordingly attract GST at the rate of 5 per cent
(for sale value less than
₹1,000) or 12 per cent (for sale value more than
₹1,000).
According
to Anita Rastogi, Partner (Indirect Taxes) at PwC, this is a classic
example where multiple rates lead to classification issues. “One of the
objectives of the GST was to do away with huge litigation faced under
old regime largely due to different tax rates for different products.
Going forward, the government should look at rationalising the rate
structure under GST,” she said.
Palayamkottai, Tamil Nadu-based
RmKV Fabrics approached AAR to get an advance ruling on classification
of three piece salwar/churidar-kurta-dupatta sets. It wanted to know
whether the three piece set would be classifiable as ‘fabrics’ and
attract only 5 per cent GST or they would be classifiable as ‘Articles
of Apparel’ and attract 5 per cent GST if their sale price is below
₹1,000 and attract l2 per cent GST if their sale price is more than
₹1,000.
The
AAR decision is binding on the applicants and the jurisdictional tax
authority. Though such a decision does not have precedent value like
that of a High Court or Supreme Court judgment, it can be used as
persuasive tool in future cases.
In this case, the applicant put
forward four models to determine ‘fabrics’ or ‘Article of Apparel.’ The
first model has unstiched top and bottom where top is merely cut into
size. The second model comprises top semi-stitched and bottom
unstitched. The third model has top stitched, but bottom unstitched.
Finally, the fourth model has top and bottom unstitched, but only the
neck portion is cut and design is made — which meant partial stitching.
However, in all the cases, the fabrics themselves could have some
embroidery work/hemming or embellishments on them. The applicant further
said the sets in question comprise three pieces of fabric and in some
of them certain degree of stitching or neck work is done. These items
cannot be worn as such and requires further stitching according to the
measurement of the user and then ultimately stitched into a complete
set. They are essentially in the form of fabric and have not attained
the characteristics of an article like a readymade shirt or pant.
CBDT circulars
The AAR took cognizance of circulars issued by the Central Board of
Indirect Taxes & Customs (CBIC). The circular dated October 27, 2017
said mere cutting and packing of fabrics into pieces of different
lengths from bundles or
thans, will not change the nature of
these goods and such pieces of fabrics would continue to be classifiable
under the respective heading as the fabric and attract the 5 per cent
GST rate. Another clarification issued on December 31, 2018, restated
this position while adding that a fabric piece or a set of pre-packed
fabric pieces, even if embroidered or embellished, will still be
considered as fabrics. The authority also considered classification
under custom tariff and gave the ruling accordingly.