Guthka, Whether Tobacco?

Introduction

Under
Sales Tax  Laws,  the rate of tax depends upon classification
of the given product under a particular entry. There are certain entries which
are with reference to classification under Central Excise Tariff act etc. in
other words, the entry may provide that if the item is covered by a particular Excise
Tariff, then the said item may be liable at nil rate or concessional rate.

under  the 
MVAT  Act,  there 
are  several  such 
items which are classified in different entries with reference to
classification under Central Excise Tariff.

Recent controversy about classification of Guthka:

After
coming into effect of the Maharashtra Value Added Tax Act, 2002, new
classification came into effect. Amongst others, exempted goods are covered by
entries in Schedule A and other taxable items are classified under Schedule B,
C, D and E. there is also an entry for tobacco (modified from time to time).
The controversy about classification of ‘guthka’ prevailed for initial two
years i.e. 2005-06 & 2006-07.

The
Hon. Bombay High Court had an occasion to decide such dispute in case of Ghodawat Energy Pvt. Ltd. Writ Petition No.
8572 of 2015 dt. 4.10.2016.

In
the above case, the dealer, m/s. Ghodawat energy india Pvt. ltd.  Was classifying its item ‘guthka’ under above
entry as tobacco. However, the department, based on explanation, held the item
as not covered by Schedule A and therefore levied tax under residuary entry E-1
at 12.5%.

To
challenge the Constitutional validity of levy of tax as well as to contend that
explanation is not retrospective and can apply only from 1.2.2006, the above
Writ Petition was filed before the Hon. Bombay High Court.

The
facts noted by the Hon. High Court in the judgment are as under:

“3.
The writ petition is filed by contending that the petitioner in this writ
petition is a private limited company, incorporated and registered under the indian
Companies act, 1956, having its registered office at the address mentioned
herein above.

4.
Respondents nos.1 to 4 are the authorities exercising powers together with the
State itself under the Maharashtra Value Added 
Tax Act,  2002 (for short “MVAT”).

5.
The petitioner, inter-alia, engages itself in the business of manufacturing pan
masala. During the period under dispute, namely, financial  year 2005-2006, the petitioner has
manufactured and sold pan masala with or without tobacco. The petitioner claims
that it has discharged its vat liability under the MVAT act. The petitioner
manufactures pan masala not containing tobacco under the brand name “Star Pan
masala” classifiable under tariff heading 21069020 of the Central Excise Tariff
act, 1985. The petitioner claims that it has discharged its vat liability of
12.5% on the sale of such pan masala not containing tobacco. At annexure-a
collectively are copies of invoices for sale of such pan masala.

6.
The petitioner also manufactured and sold pan masala containing tobacco,
commonly known as “Guthka” / “mawa” under various brand names. That is
classifiable under tariff heading 24939990 of the Central Excise Tariff act,
1985 during the relevant period. The petitioner has claimed exemption on
payment of vat on sale of such pan masala containing tobacco under Schedule
entry A-45 of the MVAT act, 2002. The relevant period is 1st April, 2005 to
31st march, 2007.

7.
The  said pan masala containing tobacco
is described in column (2) of the first 
Schedule to the additional duties of excise (Goods of Special
importance) act,1957 (for short “ADE act, 1957”). during the period 1st April,
2005 to 28th  February,  2006, the petitioners have discharged ade at
18% on the sale of such pan masala containing tobacco.

8.For
the period 1st  April,  2005 to 28th 
February, 2006, therefore, the petitioners have claimed exemption from
payment of vat on sale of such pan masala containing tobacco under Schedule
entry  A-45  of the MVAT act, 2002.

9.
Entry 45 of the Schedule a to the MVAT 
Act, 2002, as introduced, reads as under:

10.
However,  in exercise of the powers
conferred u/s. 9(1) of the MVAT act, 2002, the State Government of Maharashtra,
vide notification no. VAT/1505/Cr-382/

Taxation-1   dated 
21st    January,   2006, 
amended  the Schedule a and
Schedule C with effect from 1st February, 2006, by inserting explanation to
Schedule entry A-45 as under :­

“Explanation-
for removal of doubts, it is hereby declared that tobacco shall not include Pan
masala, that is to say, any preparation containing betel nuts and tobacco and
any one or more of the following ingredients, namely :­

(i)    Lime, 
and

(ii)   Kattha (Catechu)

Whether
or not containing any other ingredient such as cardamom, copra and menthol.”

 11. With effect from 1st march, 2006, pan
masala containing tobacco falling under 24039990 of the first Schedule to ade
act, 1957, was liable to additional duty of excise @ 18% under the said
Schedule. However, the said tobacco product was exempt from payment of
additional duty of excise in view of exemption notification no.11/2006-C.E. dated
1st March, 2006.

12.
Simultaneously,  the  rate 
of  basic  excise 
duty leviable on such tobacco products under Chapter 24 of the Central Excise
Tariff act, 1985, was suitably increased with no change in total excise duty.
In other words, practically there was no exemption from ADE Act, 1957.

13.  Consequently, with effect from 1st march,
2006, on sale of pan masala containing tobacco, petitioners paid increased
amount of central excise duty. It continued to avail exemption from payment of
vat vide entry A-45 of the MVAT for the period from 1st March, 2006 till 31st
march, 2007.

14.
Since the said pan masala containing tobacco is 
described  in  column 
(3)  of  the 
first   Schedule  to the additional duties of excise (Goods of
Special importance) act, 1957, during the relevant period of time, the
petitioners have discharged ade at 18% on the sale of such pan masala
containing tobacco. Illustrative copies of the invoices for sale of such pan
masala containing tobacco are annexed collectively as annexure-B of the paper
book.”

In
the  judgment,  arguments 
of  both  the 
sides  have been elaborately
noted. on  behalf of the petitioner, the
argument  was  that 
since  additional  duties 
of  excise are applicable, no tax
can be levied as per entry a-45. It was also argued that since State Government
shares additional duties of excise, there is a Constitutional bar on levy of
sales tax. Judgment of hon. Supreme Court in case of Godfrey Phillips (India)
Limited & Anr. vs. State of Uttar Pradesh & Ors. (2005) 2 SCC 515 was
relied upon.

In
respect of retrospective effect of explanation, it was submitted that it is issued
under a delegated power and under such circumstances, there cannot be power to
issue notification with retrospective effect.

On
behalf of department,  it was submitted
that sharing of additional duties is a matter between State and Centre and it
cannot affect the Constitutional right of a State to levy tax.

The
explanation was only for clarification of doubt and hence it was submitted that
it had retrospective effect.

The
Hon. High Court observed as under:

“63.  The 
constitutional provisions,so far referred to, our mind do not indicate
that the State is denuded, much less divested of its power to levy and impose a
tax on sale or purchase of goods. Therefore, 
Schedule VII list II entry 54 authorises the State legislature  to impose taxes on sale or purchase of goods
other than newspapers, subject to the provisions of entry 92A of list I.

64.
We  have 
no  hesitation  in 
agreeing  with  Mrs. Jeejeebhoy when she submits that these
constitutional provisions  create  no 
embargo  on  the 
State’s  power to impose tax on
the sale or purchase of pan masala containing tobacco.

68.
A bare perusal of this would indicate that the doubts were sought to be
removed. The doubts whether tobacco would include pan masala. That has been
clarified by declaring that tobacco shall not include pan masala i.e. to say
any preparation containing betel-nuts and tobacco and any one or more of the
ingredients in sub- clause (1) to clause (10). to be precise, the Government of
Maharashtra amended by the notification with effect from 1st  February, 
2006, Schedules a and C appended to the Maharashtra value added tax act
in terms of the powers conferred by section 9(1) of the MVAT act. That power is
of adding or modifying or deleting any entry in the schedule. The power is of amendment
of the Schedule as above and equally to reduce or enhance the rates of tax or
for specifying the rates of tax or for specifying the rates of tax, where nil
rates are specified.”

Conclusion

Thus,
the Hon’ble High Court rejected both the grounds and upheld levy from
retrospective effect. The classification of product under fiscal entries is a
complicated process. It appears that in respect of additional duties, the law
is still not settled and a clarification on such issues at the beginning of
classification will be more appreciated.