Summary: Classification of goods and services is one of the most consequential and litigation-prone aspects of GST because the applicable HSN or SAC classification directly affects the rate of tax, compliance obligations and, in appropriate cases, input tax credit implications. The GST classification framework substantially draws upon the Customs Tariff Act, 1975 and the Harmonized System of Nomenclature, while judicial principles developed under Customs and Central Excise law continue to influence GST disputes. Common or trade parlance, predominant use or function and the interpretation of tariff entries are among the principles frequently applied by adjudicating authorities and Courts. GST also introduces distinctive classification questions concerning composite and mixed supplies. The rate rationalisation recommended at the 56th GST Council Meeting and implemented from September 2025 has reduced the number of rate distinctions for many goods and services, potentially reducing some classification-driven disputes while creating new issues around the 40% de-merit rate and residual anomalies. Advance rulings under Section 97(2) of the CGST Act provide a mechanism for obtaining determinations on classification, although divergent rulings among State Authorities for Advance Ruling can themselves contribute to uncertainty. Classification therefore remains a central fault line of indirect taxation, connecting tariff interpretation, GST rates, compliance, litigation and dispute resolution.
Introduction
Few issues in India’s Goods and Services Tax (GST) regime invite as much litigation, confusion, and conflation as the seemingly esoteric question of classification. Take, for instance, a humble packet of biscuits, a paratha, a car seat cover, or even a “soft serve” dessert – each of these items has, at one time or another, been the subject of a dispute concerning their tax classification under GST. The reason is simple: the tax liability of 5%, 12%, 18%, or 28% (or, in some cases, a combination thereof) is directly determined by the said classification. With the introduction of “GST 2.0” in September 2025 – the indirect tax regime’s most consequential amendment since the original GST rollout in 2017 – questions pertaining to classification are set to become even more pertinent. This is, therefore, a contemporary issue in indirect taxation that has immediate practical relevance.
Statutory Regime
It is imperative to briefly discuss the statutory framework governing classification under GST. In essence, the power to levy GST on supplies of goods and services is conferred upon the government by virtue of Section 9 of the Central Goods and Services Tax Act, 2017. Classification of goods and services under GST is dealt with by Section 9 read with the Notifications specifying the rates of tax (“Rate Notifications”). However, it must be noted that the Customs Tariff Act, 1975 continues to govern the classification of goods for Customs purposes. This is a crucial distinction: the classification regime under GST does not operate in a vacuum. Instead, it largely adopts (with modifications) the system of classification previously in use under Customs and Central Excise Laws. Goods are classified under 21 sections and 99 chapters with further headings and sub-headings and identified by an 8-digit code (the “HSN Code”) in India. Notably, Chapter 99 was created to incorporate the Service Accounting Code (“SAC”) for the classification of services.
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Therefore, it can be inferred that many disputes pertinently raised before Courts in relation to GST classification have their roots in Customs and Excise jurisprudence that far predates GST.
Why is Classification Important?
While seemingly arcane, the issue of classification is of paramount practical relevance to taxpayers. The code assigned to a particular goods/service under the GST classification system determines its tax liability. This, in turn, has ramifications for return filings, taxpayer compliance, and even eligibility to claim input tax credit. Put differently, an erroneous code can lead to inaccurate tax calculations and filings, and, by extension, penalties and prosecution. It may even become a cause for concern during audits and investigations by tax authorities. Given the astronomical sums of money involved in tax liability of large-scale manufacturers, disputes pertaining to classification of goods and services often involve significant sums of money (often, on the order of crores of rupees). As a result, classification disputes are some of the most litigated issues in indirect tax law.
Classification Principles: Judicial Pronouncements
Since the GST statutes do not specify detailed classification principles, adjudication authorities and Courts have relied on principles evolved in Customs and Excise Departments. A number of foundational principles have been laid down by Courts in indirect tax litigation over the years. Some of these continue to be relevant in GST dispute resolution as well:
Common/trade parlance test – In CCE v. Connaught Plaza Restaurant (2012) the Supreme Court held that classification of “soft serve” as ice-cream is appropriate given that such a classification reflects common parlance. The Court held that classification of goods and services should be done in accordance with common trade usage and not strictly in accordance with their composition.
Dr. Abhishek Gandhi
Predominant use/function test – In Atul Glass Industries v. Collector (1986) , the Supreme Court held that classification of car glass depends on its use/function. The Court reasoned that if the glass is used for safety purposes it should be classified as safety glass, otherwise, it is motor vehicle glass. Similarly, in CCE v. Wockhardt Life Sciences Ltd. (2012) , the Supreme Court held that predominant use test should be applied to determine whether a substance should be classified as a medicament or a cosmetic.
Consignor’s responsibility rule – The Supreme Court has consistently held that it is the responsibility of the Consignor (supplier) to classify goods correctly. The said responsibility cannot be transferred to the Consignee (buyer). In Steel Authority of India Ltd. v. CCE (2022) , the Supreme Court held that the onus of classifying goods correctly lies with the Consignor and the Consignee cannot challenge such classification at a later stage. In Union of India v. Bharat Forge (2022) , the Supreme Court held that the buyer of goods is under no obligation to independently assess the classification of goods as done by the seller. In other words, no such responsibility is assigned to the Consignee by law.
Taxmann
An illustrative example of application of these principles is the paratha vs roti controversy. As observed by Dr. Abhishek Gandhi, the differences in the GST liability of parathas and rotis has led to extensive litigation in this space.
Dr. Abhishek Gandhi
Composite and Mixed Supply: A Unique GST Issue
Another issue peculiar to GST is the question of classification of goods and services supplied together. Such a scenario may arise when a hotel supplies a room along with breakfast, or when a computer is supplied along with its bag and warranty. The GST legislation addresses this issue by making a distinction between composite supply and mixed supply. In short, a composite supply is a supply of goods and services that are naturally bundled, whereas a mixed supply comprises supplies that are not necessarily bundled but are supplied together. There is a clear difference in tax implications of composite and mixed supplies. The question of whether a supply is composite or mixed often involves fact-specific analysis and is therefore a contentious issue in indirect tax law.
GST composite and mixed supply principles are frequently considered in classification and rate disputes.
GST 2.0: Classification and Related Rate Disputes
Classification disputes are therefore a serious and perennial issue in GST law. The government is fully aware of the problem, and it has initiated several measures to address it. Most notably, the 56th GST Council Meeting convened on 3 rd September 2025 approved a slew of changes to the GST rate structure. In effect from 22 nd September 2025, the new rate structure sees the abolition of the 28% tax slab and the introduction of a new 40% “de-merit” slab for goods such as luxury cars, tobacco, pan masala, and aerated water. The reform also saw the consolidation of goods and services taxed at 18% and 12% into a single 18% slab, and those taxed at 5% are mostly exempt. In effect, 99% of goods and services that attracted a 12% tax rate and 90% of those taxed at 28% are now subject to a 5% tax rate. The rationale behind this change was explicitly articulated by the government as being related to addressing classification disputes and inverted duty structures.
Lingayas Vidyapeeth
As discussed above, the new rate structure is supposed to have direct implications for disputes pertaining to classification of goods and services. Goods and services that previously attracted different tax rates are now subject to a single tax rate. By reducing the number of tax slabs and consolidating them around the 5% and 18% rates, the government is expected to reduce the number of classification disputes since there would be less incentive in disputing a classification in order to avail of the benefits of a lower tax rate. Early evidence suggests that the amendment has had the desired effect. For instance, gross GST revenue in December 2025 was recorded at Rs 17.5 lakh crore – up 6.1% year-on-year – in the first post-GST 2.0 festive season review.
Vajiramandravi anantamias
It shall also be noted that, despite the reduction in the number of tax slabs, several disputes are anticipated. Most notably, the introduction of a 40% tax slab on “de-merit” goods and services is bound to generate additional litigation. Furthermore, there are several anomalies in the tax rate structure that persist and could potentially give rise to dispute.
Persistent Issues with Classification
Some issues related to classification of goods and services are likely to persist even after the introduction of GST 2.0. Chief amongst these is the perennial problem of new goods and services that do not have a corresponding entry in the HSN/SAC system. In such cases, the goods/services in question have to be classified by taxpayers via an application to the appropriate authority. This issue is exacerbated by the fact that various State Authority for Advance Rulings have, on occasion, issued dissimilar rulings for identical products. The Authority for Advance Rulings has been entrusted by the government with the power to issue binding rulings on classification of goods and services by virtue of Section 97(2)(a) of the CGST Act, 2017. In short, such rulings are binding on the taxpayer who has applied for them as well as the jurisdictional officer unless there is a change in law or facts.
Classification of goods and services under GST is therefore closely connected with the HSN framework, tariff interpretation and the rate notifications.
Virtual Auditor Additionally, the vexed issue of composite/mixed supply (discussed above) also continues to be a serious dispute driver.
Conclusion
The GST classification framework sits at the intersection of diverse principles of indirect tax law. From a practical standpoint, it is a highly technical area of law that touches upon issues of tariff classification and international trade. However, the implications of tariff classification are far-reaching – the taxability of a goods/service and its GST liability are directly determined by its classification. The new rate structure introduced by GST 2.0 is the government’s most significant step towards addressing persistent issues in classification of goods/services. Classification disputes figure in almost all areas of indirect tax litigation, from customs duty disputes to disputes pertaining to input tax credit. The fact that the government has reserved a separate category of goods for which tax rate is to be determined by the taxpayer shows that the issue of classification disputes will not be resolved by GST 2.0 but will instead be mitigated.
References
1. The Central Goods and Services Tax Act, 2017 (Act 12 of 2017), s. 9.[1]
2. The Customs Tariff Act, 1975 (Act 51 of 1975), First Schedule.[2]
3. Notification No. 1/2017-Central Tax (Rate), Ministry of Finance, Department of Revenue, Government of India, June 28, 2017.[3]
4. Notification No. 11/2017-Central Tax (Rate), Ministry of Finance, Department of Revenue, Government of India, June 28, 2017.[4]
5. Commissioner of Central Excise, New Delhi v. M/s Connaught Plaza Restaurant (P) Ltd., [2012] 11 S.C.R. 365.[5]
6. Atul Glass Industries (Pvt.) Ltd. v. Collector of Central Excise, (1986) 3 SCC 480.[6]
7. Commissioner of Central Excise v. Wockhardt Life Sciences Ltd., (2012) 5 SCC 585.[7]
8. M/s Steel Authority of India Ltd. v. Commissioner, Central Excise & Customs, Bhubaneswar, 2022 SCC Online SC 1232.[8]
9. Union of India v. Bharat Forge Ltd., 2022 SCC Online SC 1018.[9]
10. Ministry of Finance, Government of India, “Recommendations of the 56th Meeting of the GST Council,” Press Information Bureau, September 3, 2025.[10]
Notes:
[1] Section 9 is the statutory basis for the levy of central GST and is reflected in the GST rate notification framework.
[2] GST tariff classification of goods draws upon the Customs Tariff framework and its interpretative rules, Section Notes and Chapter Notes.
[3] Notification No. 1/2017-Central Tax (Rate) notified the CGST rate schedules for goods.
[4] Notification No. 11/2017-Central Tax (Rate) provides the GST rate framework for specified services.
[5] Commissioner of Central Excise, New Delhi v. M/s Connaught Plaza Restaurant (P) Ltd.
[6] Atul Glass Industries (Pvt.) Ltd. v. Collector of Central Excise, (1986) 3 SCC 480.
[7] Commissioner of Central Excise v. Wockhardt Life Sciences Ltd., (2012) 5 SCC 585.
[8] M/s Steel Authority of India Ltd. v. Commissioner, Central Excise & Customs, Bhubaneswar, 2022 SCC Online SC 1232.
[9] Union of India v. Bharat Forge Ltd., 2022 SCC Online SC 1018.
[10] Recommendations of the 56th Meeting of the GST Council, September 3, 2025.
