GST Classification of Goods and Services: Evolving Principles, GST 2.0 Changes and Litigation Trends
1. Overview: Why Classification Drives GST Outcomes
Questions of classification of goods and services sit at the heart of India’s GST framework. Everyday products such as biscuits, parathas, car seat covers or “soft serve” dessert have all become subjects of contested interpretation because their HSN/SAC classification directly determines which GST rate applies.
Under GST, a single change in classification can move a supply between 5%, 12%, 18%, 28% or, after the 2025 reforms, even a 40% “de-merit” bracket. That shift affects:
- The final price charged to the consumer
- The assessee’s liability under GST
- Input tax credit (ITC) planning and accumulation
- The risk of audits, demands, penalties and prosecution
With the advent of the “GST 2.0” rate overhaul from September 2025, issues around classification have not disappeared; they have changed shape. While the consolidation of slabs may lessen some disputes, the introduction of a 40% rate on specified “de-merit” supplies and structural anomalies ensures that classification continues to be a central pressure point in indirect taxation.
This article explains the statutory regime, traces key judicial principles that still govern classification under GST, examines the composite versus mixed supply question, and analyses the impact of GST 2.0 on existing and emerging classification disputes.
2. Statutory Framework for GST Classification
2.1 Charging provision and rate notifications
The authority to levy central GST on supplies of goods and services flows from Section 9 of the Central Goods and Services Tax Act, 2017. In practice, classification and applicable tax rates are worked out through:
Section 9of the CGST Act 2017, read with- Notification No. 1/2017-Central Tax (Rate) for goods, and
- Notification No. 11/2017-Central Tax (Rate) for services
These “Rate Notifications” are structured around the Customs Tariff Act, 1975, and the Harmonized System of Nomenclature (HSN). Thus, GST classification is not an entirely self-contained regime; it substantially borrows the tariff language, section notes, chapter notes and interpretative rules found in the First Schedule to the Customs Tariff Act, 1975.
2.2 HSN Code and SAC structure
For goods, the tariff is organised into:
- 21 Sections
- 99 Chapters
- Various headings and sub-headings
In India, goods are usually identified by an 8-digit HSN code.
For services, Chapter 99 has been earmarked to house the Service Accounting Code (SAC) structure. In effect:
- Goods are referenced by HSN
- Services are referenced by SAC
Because GST classification builds on the Customs Tariff framework, many current GST disputes echo controversies that first arose under Customs and Central Excise law. The body of pre-GST jurisprudence remains highly relevant and is routinely invoked in GST adjudication and appellate forums.
3. Why Correct GST Classification is Critical
For an assessee, classification is not a mere academic exercise. It has tangible downstream effects:
- Determination of applicable GST rate: The HSN/SAC entry applicable to a particular supply directly dictates its GST rate and therefore its output tax liability.
- Accuracy of returns and reporting: Form-wise disclosure often hinges on correct HSN/SAC reporting. Incorrect classification can distort turnover mapping, exemptions and rate disclosures.
- Input Tax Credit implications: The eligibility to avail and utilise ITC may depend on whether a supply is treated as goods or services, exempt or taxable, or subject to a particular rate.
- Exposure to audit and enforcement: Misclassification can give rise to show cause notices, invocation of extended period, penalties and even prosecution in severe cases.
For large-scale manufacturers and service providers, even a minor rate differential can translate into liability on the scale of crores of rupees. As a result, classification disputes constitute one of the most litigated categories of indirect tax controversy, spilling across departmental adjudication, appellate tribunals and higher judiciary.
4. Judicially Evolved Principles Guiding Classification
The GST law does not lay down exhaustive rules for classification. Consequently, adjudicating authorities and Courts draw heavily from principles crystallised under Customs and Central Excise law. The following doctrines continue to inform GST classification disputes.
4.1 Common or trade parlance test
In Commissioner of Central Excise, New Delhi v. M/s Connaught Plaza Restaurant (P) Ltd. [2012] 11 S.C.R. 365, the Supreme Court upheld the treatment of “soft serve” as “ice-cream” for classification purposes.
Key takeaways from this line of decisions:
- Classification should reflect how the product is understood in common or trade parlance, i.e., by ordinary consumers and traders, rather than being confined purely to technical or scientific description.
- Composition and ingredients, while relevant, are not necessarily decisive if the market and consumer perception consistently recognises the product under a particular description.
This common parlance approach frequently guides classification debates around everyday consumables such as snacks, ready-to-eat items, sweets, bakery products and similar items.