Tobacco Leaves in Small Pouches under GST: Why They Fall under Chewing Tobacco (2403 9910)

1. Background and Core Dispute

The Gujarat High Court in Patel Products & Anr. Vs Union of India & Ors. examined an important classification dispute under the GST regime. The controversy centred on whether non fermented, non liquored, crushed tobacco leaves, sold in small branded retail pouches for chewing, should be treated as:

  • Tariff Heading 2401 – “unmanufactured tobacco; Tobacco refuse”, or
  • Tariff Heading 2403 9910 – “chewing tobacco”

The answer to this classification question directly impacts the GST rate and Compensation Cess, as tobacco under 2401 and 2403 9910 attracts different tax and cess slabs.

Several connected writ petitions were heard together because they raised the same core question: Are crushed tobacco leaves in branded retail pouches, meant for chewing, still “unmanufactured tobacco” under 2401, or do they become “chewing tobacco” under 2403 9910?

The High Court ultimately upheld the authorities’ view that such products are “chewing tobacco” under Tariff Heading 2403 9910, not “unmanufactured tobacco” under 2401.

2. Factual Matrix Across the Petitions

2.1 Business model and historical classification

Across the various petitions, the assessees were engaged in the following broad activities:

  • Procuring dried tobacco leaves or cut tobacco (classified by suppliers under 2401 as “unmanufactured tobacco”).
  • Performing basic processes such as cleaning, sieving, sometimes cutting/crushing.
  • Repacking bulk tobacco into small branded pouches (often below 10 grams), clearly marketed for chewing.
  • Using brand names such as:
    • “OM SPECIAL PANDHARPURI TAMBAKKU NO.1”
    • “Mahendra Pandharpuri Tamaku”
    • “Suresh Tamakhu”
  • Indicating on the packaging that the product is chewable tobacco, albeit sometimes also described as “unmanufactured tobacco” or “non-edible”.

Before GST:

  • The assessees had Central Excise registrations, and their products were treated as “unmanufactured tobacco” under Tariff Heading 2401.
  • The Central Excise Department had even issued a classification certificate in one case under 2401.
  • They relied on CBEC Circular F. No. 81/5/87-CX.3 dated 23.06.1987 and a later clarification F. No. 81/01/2015-CX-3 dated 01.04.2015, which treated certain broken/sieved tobacco packed in pouches as “unmanufactured tobacco” under 2401.

Post-GST implementation (from 01.07.2017):

  • The assessees migrated to GST and continued classifying their goods as “unmanufactured tobacco” under 2401, paying:
    • 28% GST (14% CGST + 14% SGST) under Notification No. 01/2017-Central Tax (Rate), Schedule IV; and
    • Compensation Cess at 71% for branded unmanufactured tobacco without lime tube under Notification No. 01/2017-Compensation Cess (Rate).

2.2 Departmental investigation and demands

Actions by the GST authorities and DGGI included:

  • Searches at business premises in Gujarat (Anand, Petlad, Vapi, etc.).
  • Recording of statements of partners.
  • Drawing samples of the products and sending them to CRCL for testing.
  • Multiple show cause notices under the GST regime (and earlier under Central Excise) alleging that the products were in fact “chewing tobacco” under 2403 9910, attracting:
    • Higher Compensation Cess at 160% for 2403 9910 (chewing tobacco without lime tube), versus 71% for unmanufactured tobacco.
  • In one major case, a show cause notice invoked the extended period under section 74 of the GST Act, demanding:
    • Compensation Cess of Rs. 413,48,78,774/- for July 2017 to March 2023; and
    • GST of Rs. 17,86,80,879/- for June 2019 to March 2023, with interest and penalties.

One assessee had earlier obtained a favourable classification order from CESTAT under the Central Excise regime, where the Tribunal held the product to be “unmanufactured tobacco” under 2401, and the department did not file appeal due to low tax effect.

However, under GST, fresh show cause notices were issued insisting on reclassification under 2403 and demanding differential GST and Compensation Cess.

3. Assessees’ Key Contentions

3.1 Reliance on historical practice and excise-era circulars

The assessees argued that:

  • Their products were always treated as 2401 unmanufactured tobacco since 1990/1995 under Central Excise.
  • CBEC Circular F. No. 81/5/87-CX.3 dated 23.06.1987 clarified that unmanufactured tobacco, even if broken, beaten, sieved and packed in branded retail pouches for chewing (commonly called “zarda”), remained classifiable under Tariff Heading 2401.
  • The later letter dated 01.04.2015 (F. No. 81/01/2015-CX-3) reaffirmed that unmanufactured tobacco sold in small branded packs was still under 2401.
  • Therefore, their crushed/sieved tobacco leaves packed into small sachets should continue to be covered by 2401, even under GST.

3.2 No “manufacture” under GST – only repacking

The petitioners maintained that:

  • They only repack bulk unmanufactured tobacco into smaller pouches; they do not add lime, flavouring, perfumes, or other substances, nor carry out fermentation or liquoring.
  • CRCL reports described the goods largely as broken leaves with stems, supporting the claim of being unmanufactured tobacco.
  • Under Section 2(72) of the GST Act, “manufacture” requires emergence of a new product with a distinct name, character, and use.