GST Rate and HSN Classification on Reusable Gunny Bags: Comprehensive Analysis of the Kerala AAR Decision
The determination of the correct Goods and Services Tax (GST) classification for industrial by-products, secondary outputs, and used packaging materials often presents a complex challenge for businesses. A recurring area of litigation and confusion revolves around whether used packaging items should be treated as "scrap" or as "reusable goods." The Authority for Advance Ruling (AAR), Kerala, recently provided crucial clarity on this subject in a matter concerning the disposal of used jute sacks.
This article provides an in-depth summary and legal analysis of the ruling, exploring the statutory interpretations, the application of judicial precedents, and the fundamental principles distinguishing reusable packaging from waste.
1. Factual Matrix of the Dispute
The assessee, Kerala Cooperative Milk Marketing Federation Limited (widely recognized as Milma), operates a prominent manufacturing facility in Malampuzha, Palakkad. The plant is dedicated to the production of animal feed and various nutritional supplements.
1.1 Procurement and Generation of Empty Bags
During its routine manufacturing operations, the assessee procures substantial quantities of agricultural raw materials, including maize, cotton seed, coconut cake, and de-oiled rice bran. These inputs are delivered to the factory in two primary types of packaging:
- Polypropylene (PP) bags
- Gunny bags (specifically, jute woven sacks devoid of any plastic coating)
Once the raw materials are emptied and consumed in the production cycle, the assessee is left with a massive inventory of empty packaging materials. To clear warehouse space and recover costs, the assessee periodically auctions these empty bags via an e-tender mechanism.
1.2 The Core Conflict: Scrap vs. Reusable Material
The assessee historically treated the disposal of used PP bags as the sale of scrap, classifying them under HSN 391590 and discharging a GST liability of 18%. This practice was uncontested.
However, a dispute emerged regarding the used gunny bags. The assessee maintained that these jute sacks were not scrap but rather reusable packaging containers. Buyers purchasing these bundles (typically grouped in lots of 50) intended to reuse them for packaging whole cereals and other agricultural produce. While the assessee had previously issued invoices describing the items as "old gunny bags" under HSN 630510 with a 5% GST rate, certain past tenders had erroneously applied an 18% GST rate. Bidders raised objections, arguing that the 5% rate was legally appropriate.
To eliminate this ambiguity before floating fresh tenders, the assessee approached the Kerala AAR to ascertain the precise HSN classification and the applicable tax rate.