In India, hand sanitizers are manufactured in the form of liquid, gel or foam and its demand has shot up during recent times. Many Sugar Mills and distilleries are also engaged in manufacturing/supplying alcohol-based hand sanitizers.
In India many liquor manufacturing companies and distilleries have commenced manufacturing of sanitizers amid huge demand post Covid-2019. The issue of correct classification is a compliance issue as the rate of GST is different based on HSN classification. Sanitizers are not exempt from tax and have to be appropriately classified for levy of GST as any wrong or mis-classification may result in short payment of tax leading to tax evasion and consequent costs in terms of interest, penalties etc.
In customs as well as in GST, goods are classified for tax purposes on the basis of Harmonised System of Nomenclature (HSN) code. HSN code is a uniform code acceptable worldwide given to various products (over 5000 or so). Post Covid-2019, few relatively new products have come to be known which are now products of mass consumption. One such product is Sanitizer which also have alcohol and /or ethyl alcohol.
The product [hand sanitizer (alcohol based)] has ingredients such as Ethyl Alcohol LP, Glycerol LP, Hydrogen Peroxide LP., purified water etc. Hand sanitizers having ethyl alcohol as ingredient is a alcohol based product and is correctly classified under heading 3808 of HSN. The active ingredient of Ethyl Alcohol LP. is over 70% in most of the cases.
Many manufacturers and suppliers, including sugar mills & distilleries, are classifying alcohol-based hand sanitizer under tariff heading 3004 while actually it should be under tariff heading 3808 of HSN (Harmonised System of Nomenclature). Globally, World Customs Organization (WCO) also holds that alcohol based hand sanitizers are classifiable under the heading 3808 of HSN.
The GST rate on products under tariff heading 3004 is 12 per cent while for those under 3808, it is 18 per cent. Since there is a difference of 6% tax between two codes, companies tend to choose a the code leading to lower tax to be competitive in the market. However, GST being an indirect tax , it does not affect the manufacturer or the supply chain. Misclassification appears to have resulted in substantial evasion of GST.
According to classification opinion of World Customs Organization (WCO), a nodal organization for determining classification of the merchandise goods based on Harmonized Commodity Description and Coding Systems, the WCO has inferred that Alcohol based hand sanitizers are correctly classifiable under heading 3808 of HSN (precisely under sub heading 3808.94), i.e.,
Heading 3004: Medicaments (excluding goods of heading 30.02, 30.05 or 30.06) consisting of mixed or unmixed products for therapeutic or prophylactic uses, put up in measured doses (including those in the form of transdermal administration systems) or in forms or packings for retail sale, including Ayurvaedic, Unani, homoeopathic siddha or Bio-chemic systems medicaments, put up for retail sale.
Heading 3808: Insecticides, rodenticides, fungicides, herbicides, anti-sprouting products and plant-growth regulators, disinfectants and similar products, put up in forms or packings for retail sale or as preparations or articles (for example, sulphurtreate bands, wicks and candles, and fly-papers).
Having come to know that some manufacturers of “Hand Sanitizers (Alcohol based)” are wrongly classifying the said item under tariff heading 3004 (12% GST) whereas the said item is liable to be classified under tariff heading 3808 (18% GST), revenue authorities (Director General of GST Intelligence) have started investigation into the huge tax evasion going on due to lower taxes being paid on hand sanitizers. There is a specific direction to all revenue authorities that mis-classification of hand sanitizers manufactured / supplied by sugar factories/distilleries may be verified in order to plug any revenue leakages. It is estimated that tax evasion may be over Rs. 50 crores. DG-GSTI has already initiated the investigation.
Many companies dealing in alcohol-based hand sanitizers are classifying the same under tariff heading 3004 (12% GST) of HSN whereas the same are correctly classifiable under heading 3808 (18% GST) of HSN. Thus, the misclassification of ‘Hand sanitizers’ (Alcohol based) appears to have resulted in substantial evasion of GST.
Government’s view point
As clarified by Ministry of Finance by Press dated 15.07.2020, the GST rates on various items are decided by the GST Council where the Central Government and all the state governments jointly decisions. Sanitizers are disinfectants like soaps, anti-bacterial liquids, dettol etc which all attract duty standard rate of 18% under the GST regime. Inputs for manufacture of hand sanitizers are chemicals packing material, input services, which also attract a GST rate of 18%. Reducing the GST rate on sanitizers and other similar items would lead to an inverted duty structure and put the domestic manufacturers at disadvantage vis-a-vis importers. Lower GST rates help imports by making them cheaper which is against the nation’s policy on Atmanirbhar Bharat. Consumers would also eventually not benefit from the lower GST rate if domestic manufacturing suffers on account of inverted duty structure. Therefore, hand sanitizers attract GST at the rate of 18%.