GST Classification of Food and Beverages in India: Rules, Disputes, and Recent Court Rulings

Classifying food and beverage products correctly under the Goods and Services Tax regime is one of the most commercially significant compliance challenges for Indian manufacturers and importers. The GST rate schedule categorises food products across multiple headings of the Customs Tariff Act, 1975, as adopted by GST law, with rates ranging from nil to 28 percent depending on the nature and processing level of the product. Small differences in classification, whether a product is a fruit drink, a fruit juice, a beverage base, or an aerated drink, can translate into rate differences of 18 percentage points or more. Courts and the Authority for Advance Rulings have been busy resolving these classification disputes, with the Supreme Court recently ruling on the applicable rate for the well-known beverage concentrate Rooh Afza.

How the GST Rate Schedule Treats Food and Beverages

The GST rate structure for food and beverages follows the logic of the Harmonised System of Nomenclature (HSN) and the Customs Tariff headings. Unprocessed or minimally processed food items, including fresh vegetables, milk, and cereals, generally attract nil or 5 percent GST. Processed food items attract 12 or 18 percent. Aerated beverages, which include carbonated soft drinks, attract 28 percent GST plus a 12 percent compensation cess, making the effective rate 40 percent, the highest in the food and beverage category. Fruit juices and vegetable juices classified under HSN 2009 attract 12 percent. Mixed fruit drinks classified under HSN 2202, which covers waters including mineral and aerated waters and other non-alcoholic beverages, attract 18 percent. Sherbets and beverage concentrates designed to be diluted before consumption have fallen into contested territory, with manufacturers arguing for the lower fruit drink or juice rate and tax authorities contending for the higher beverages rate.

How Classification Disputes Arise

Classification disputes under GST most commonly arise when a product does not fit cleanly into a single HSN heading, when the same product is used in multiple ways by different consumer segments, or when the product undergoes a change in formulation that the manufacturer believes shifts it into a lower-rated category. Under the GST regime, the taxpayer is responsible for self-classifying goods and reporting the applicable rate in their returns. Tax authorities can re-classify the product during scrutiny or audit, raising a demand for the differential tax, interest, and penalties. To obtain advance certainty, manufacturers and importers can approach the Authority for Advance Ruling (AAR) in their state. AAR rulings, however, bind only the specific applicant and not others in the same industry, which has led to inconsistent state-level rulings on the same product, a well-documented problem in Indian GST administration. The National Appellate Authority for Advance Ruling (NAAAR) was established to resolve contradictory AAR rulings from different states, but its caseload has grown substantially.

The Rooh Afza Ruling: A Recent Example

The Supreme Court recently ruled on the GST classification of Rooh Afza, the well-known fruit and herb concentrate produced by Hamdard Laboratories. The dispute centred on whether Rooh Afza, which is typically consumed by diluting the concentrate in water or milk, should be classified as a fruit drink attracting the concessional rate, or as a concentrate for beverages at the higher rate. The Supreme Court ruled in favour of classification at the concessional rate applicable to fruit drinks, holding that the product's primary characteristic and intended use as a fruit-based beverage meant that the lower rate applied. The ruling is significant not merely for Hamdard but for the broader category of beverage concentrates and syrups that are sold in diluted or undiluted form, since the classification principle articulated by the Court will influence how tax authorities and tribunals approach similar products.

Key Classification Principles from Indian Courts

Indian courts have developed several guiding principles for resolving GST and pre-GST excise classification disputes over food and beverages. The first is the principle of essential character: where a product has multiple characteristics, courts ask which characteristic is most essential to the product's identity in the market and in the tariff. The second is the trade parlance test: how is the product known and understood in the trade? If traders, manufacturers, and consumers consistently treat the product as belonging to a particular category, that understanding may guide classification even if the ingredients or processing technically straddle two headings. The third principle is that fiscal statutes should be interpreted strictly: where two headings could apply, the court looks at the specific heading versus the general heading and applies the rule that a more specific description takes precedence over a general one. The fourth principle, from the HSN explanatory notes which carry persuasive value, is that products sold in concentrated form for dilution before use may be classified on the basis of the nature of the diluted product, not the concentrate.

Practical Takeaways

Manufacturers and importers of food and beverage products should review their current GST classification, especially if the products are concentrates, mixed beverages, or products whose ingredients span multiple HSN headings. Any product that has received inconsistent AAR rulings from different states, or that is the subject of an ongoing audit demand, should be assessed against the most recent judicial guidance. Applying for an advance ruling before launching new products or reformulating existing ones is a prudent step, even though AAR rulings bind only the applicant: the ruling provides a documented basis for the rate applied. Where a product has been incorrectly classified and a higher rate was applicable, voluntary disclosure and payment of the differential tax, with the applicable interest, is preferable to awaiting a show-cause notice that will carry penalties in addition to the tax and interest. The GST classification landscape for food and beverages will continue to evolve through court decisions, CBIC clarifications, and GST Council recommendations, making periodic classification reviews a necessary part of GST compliance for companies in this sector.