Classification of indigenous ‘Rab’ prepared from sugar cane: The final decision

Introduction

The issue of classification of the product ‘Rab’ and applicable rate of tax on its supply has been a subject matter of dispute for a long time. In simple terms, ‘Rab’ is a semi-solid state of sugarcane juice. It occurs midway during the process of dehydrating the sugarcane juice and converting it into jaggery. The process for obtaining ‘Rab’ starts from the extraction of the cane juice from the Sugar Cane which is sent further for sulphation to remove the impurities. After the removal of impurities, the cane juice is heated up to 100^oC, and the impurities are allowed to settle leaving a clear juice on top. This clear juice is later concentrated into ‘Rab’. It is essential that the juice remains in a semi-solid state.

The industry has been classifying the product ‘Rab’ under Chapter Headings 1701, 1702 or 1703 and were discharging GST accordingly. In this background, the Government vide Circular No. 189/01/2023-GST dated 13 January 2023 had issued clarification with respect to applicable GST rates on the supply of ‘Rab’. In this article, we intend to highlight the divergent practices followed by the industry and analyse if the above Circular has resolved the issue in entirety.

Issues and concerns with the existing classification

Prior to the clarifications issued by the Government, there was a confusion prevalent in the industry regarding the correct classification of ‘Rab’ and applicable rate of tax thereon. The industry generally classified the ‘Rab’ under the following Chapter Headings viz. 1701, 1702 or 1703. It was thus unclear as to whether ‘Rab’ is subject to tax at the rate of 28% or 18% or 5% or Nil. The relevant entries in the Rate Notification pertaining to supply of ‘Rab’ is tabulated hereunder:

At this juncture, it is pertinent to note that the Uttar Pradesh Rab (Movement Control Order), 1967 defines ‘Rab’ as ‘massecuite prepared by concentrating sugarcane juice on open pan furnaces, and includes Rab Galawat and Rab Salawat, but does not include khandsari molasses or lauta gur.’ It would also be pertinent to note that the Supreme Court in the Krishi Utpadan Mandi Samiti v. Shankar Industries, 1993 SCR (1) 1037 has clarified that the classification of Rab would be under CTH 1702 (Other sugars) as opposed to CTH 1703 (Molasses). The Krishi Utpadan case also clarified that the distinction between Molasses and Rab is such that Molasses is the residue of the ‘khandsari’ (brown sugar) made out of Rab.

Clarifications issued after the 48^th Council Meeting vide Circular No. 189/01/2023-GST dated 13 January 2023

In accordance with the recommendations made by the 48^th GST Council Meeting, the Central Government vide Circular No. 189/01/2023-GST dated 13 January 2023 issued the clarifications with respect to applicable GST rates on the supply of ‘Rab’ and categorized it under HSN Code 1702 with 18% GST. The circular also relied on the ‘Krishi Utpadan Mandi Samiti’ case and stated as follows ‘In Krishi Utpadan Mandi Samiti v. Shankar Industries, 1993 SCR (1) 1037, the Supreme Court has distinguished between the molasses and Rab. Accordingly, the Rab cannot be classified under CTH 1703.’ The state of the concentrate was used to determine the classification as CTH 1702.

The Circular has clarified that ‘Rab’ is distinct from Molasses on the basis of the Krishi Utpadan Samithi case and that it would also be distinguishable from Sl. No. 91 in Schedule-I of Notification No. 1/2017-Central Tax (Rate), under CTH 1701 which includes ‘Beet sugar, cane sugar’. Since the concentration of ‘Rab’ is in semi-solid state, it would be appropriate to classify the same under CTH 1702. Therefore, as there was ambiguity in the classification of the product and also the applicability of GST, the liability for payment of differential tax for the past period should not be fastened on the taxpayer who had claimed exemption or paid GST at lower rate based on the industry practice or upon their bona fide belief. However, it is pertinent to note that, while the aforementioned Uttar Pradesh Rab (Movement Control Order) tries to cover both Rab Galawat and Rab Salawat within its ambit, the circular creates a distinction between them leading to an incongruency in the interpretation of the Movement Control Order and the Circular.

The necessary clarification issued by the Board has highlighted the lack of appropriate classification for the indigenous products as they are derivatives of agricultural produce and are exclusively used in certain regions of India. Further clarity is also necessary regarding the classification at eight-digit level to understand the exact classification of ‘Rab’. This clarification should also be able to shed light on the source of the product as the classification of goods under Chapter 17 depends on the sucrose content by weight in the dry state. Furthermore, the applicability of exemptions under Notification No. 2/2017-Central Tax (Rate), dated 28.06.2017 and classification under Sl No. 92 of Schedule-I of Notification No.1/2017-Central Tax (Rate) also need to be considered to claim the benefits.

49^th GST Council Meeting and the way forward

The 49th GST Council Meeting held on 18.02.2023 has put forth certain recommendations relating to the applicable rate of GST on supply of ‘Rab’. The Council has recommended that a change be brought in the existing rate of 18% to 5% if it is sold pre-packaged and labelled or at ‘Nil’ rate if sold in any other form.

A harmonious reading of the 49^th GST Council recommendation and the Circular No. 189/01/2023-GST dated 13 January 2023 concludes that the product ‘Rab’ which is currently taxable at 18% under Entry No. 11 of Schedule-III of the Rate Notification, would be taxable at 5% or at Nil rate from the notified date. As per the Press Release dated 18.02.2023, the recommendations of the Council also stated that it has been decided to regularize the payment of GST on ‘Rab’ during the past period on ‘as is basis’ on account of genuine doubts over its classification and applicable GST rate. Therefore, the suppliers who were classifying the ‘Rab’ under Chapter Heading 1701 and claiming exemption under entry 94 of Notification No. 2/2017-Central Tax (Rate), dated 28.06.2017 or discharging GST at 5% under Entry No. 91 of Schedule-I to the Rate Notification may not be required to pay any differential tax. It would be interesting to look out for the additional clarifications regarding the applicability of exemptions to ‘Rab’ and availment of the benefits for the industry.

[The authors are Associate Partner, Principal Associate and Associate, respectively, in the Indirect Tax Advisory practice at Lakshmikumaran & Sridharan Attorneys, Bengaluru]