India adheres to harmonised system of nomenclature
India, being a WTO member, now adheres to the world body’s harmonised system of nomenclature (HSN) for classification of goods for purposes of the Customs, central excise and compilation of foreign trade statistics.
By Gireesh Chandra Prasad & KG Narendranath, TNN |
How goods, services and industries are classified is bound to be one major determinant of how government policies work. India, being a WTO member, now adheres to the world body’s harmonised system of nomenclature (HSN) for classification of goods for purposes of the Customs, central excise and compilation of foreign trade statistics.
HSN is an evolving code system that needs to be constantly updated to factor in introduction of new product variants and value-additions. India’s Customs tariff manual now recognises goods as described through the 8-digit HSN code. The US and the EU, along with some other countries, have already moved past us, adopting 10/12 digit codes. There are over 10,000 tariff lines as specified under HSN code in India now. “As far as HSN code is concerned, India is more or less in sync with the world,” says Indian Institute of Foreign Trade director KT Chacko.
However, goods are classified comparatively clumsily under the state VAT system. The promise is that an HSN-type classification system would be introduced prior to the proposed thorough revision of VAT rates. The relevance of harmonised system of classification of goods at the Centre and state levels would be more important in the proposed dual goods and services tax (GST) regime at the federal and state levels. If cascading of taxes is to be avoided, the business processes of the two GSTs (central and state) should be uniform.
As things stand, there is no guarantee now that we will move towards single “revenue-neutral” rate for GST. Even if it is dual GST, there could be more than one rates for each. So, classification of goods would continue to be important in the determination of tax. “Importance of harmonised system of classification would be less when rates are few. Although that seems to be the future, still single rate would be impractical. There would also be a list of exemptions,” says Foundation for Public Economics and Policy Research director Mahesh Purohit.
Finer description of goods would reduce the scope for disputes between the government and the taxpayer. It would also somewhat thwart the taxpayer’s bid to bring the government to task by wrongfully claiming a tax rate different from what the government intended. Also, in the GST regime, chances of individual states digressing from the rates agreed upon at the national level would be less.
Another area where classification would play a role in policymaking as well as implementation is that of the industry itself. India continues to follow a somewhat old model (evolved in 1987) to classify industries. This at a time technology fast evolves to create new niche areas and hence branch out into stand-alone industries. Consider the recent controversies over Press Note 5 2005 (new avatar of the earlier Press Note 1).
Companies in sunrise sectors like biotechnology say they face unnecessary hassles because foreign investors need to get the consent of their existing partners in traditional sectors while investing in another company that is too advanced to be bracketed within the same broad classification of industry due to the sophistication of technology used.
One case which is now being investigated by government agencies because of an existing partner’s opposition to its foreign collaborator’s fresh investment in another company is of Paris-based food and dairy products maker Groupe Danone. The diversified Wadia group, which has a joint venture with Danone called Danone-Wadia BSN India Ltd, has opposed the investments Danone’s Daninvest has made in Avesthagen. Daninvest purchased minority stake in Avesthagen in 2006 for product development in bio-nutritionals. Because of the opposition, an investigation into it is pending with the enforcement directorate, an agency that enforces foreign exchange laws. Avesthagen has told ET that its “clinically-validated food products with a therapeutic benefit” should be distinguished from other companies’ “glucose biscuits” so that foreign investors that have a partner in the latter segment do not face a problem while investing in Avesthagen’s highly niche and emerging business.
When asked about the need for a finer distinction of industries for the purpose of deciding whether the existing partner’s consent was required in this context in a dynamic economy, finance ministry officials clarified to ET that industries cannot be re-classified based on “marginal difference” in technology.
“We are not in the same business and, therefore, there is no question of Groupe Danone requiring to take any other party’s consent before investing in us. In fact, there is no research-based company in the entire world that has a strategy or product line of the same nature as we have,” Avesthagen’s vice-chairperson and managing director Villoo Morawala Patell told ET recently.
Says a finance ministry official: “This is hair-splitting logic. We cannot have numerous classification based on marginal difference in technology. The field officers are not equipped to deal with the finer nuances of latest technology that go into marginally different products in the same class of products. We follow the standard industrial classification that the world follows. Show us where we are behind other nations, we will look into it. We cannot have different dispensation to suit individual companies.”
The guidelines for foreign and technical collaboration defines “same field” of business as per a four-digit national industrial classification of 1987. Perhaps, despite the finance ministry’s assertion to the contrary, we are not keeping pace with the world on this score. The result: unnecessary hardship to foreign investors.
HSN is an evolving code system that needs to be constantly updated to factor in introduction of new product variants and value-additions. India’s Customs tariff manual now recognises goods as described through the 8-digit HSN code. The US and the EU, along with some other countries, have already moved past us, adopting 10/12 digit codes. There are over 10,000 tariff lines as specified under HSN code in India now. “As far as HSN code is concerned, India is more or less in sync with the world,” says Indian Institute of Foreign Trade director KT Chacko.
However, goods are classified comparatively clumsily under the state VAT system. The promise is that an HSN-type classification system would be introduced prior to the proposed thorough revision of VAT rates. The relevance of harmonised system of classification of goods at the Centre and state levels would be more important in the proposed dual goods and services tax (GST) regime at the federal and state levels. If cascading of taxes is to be avoided, the business processes of the two GSTs (central and state) should be uniform.
As things stand, there is no guarantee now that we will move towards single “revenue-neutral” rate for GST. Even if it is dual GST, there could be more than one rates for each. So, classification of goods would continue to be important in the determination of tax. “Importance of harmonised system of classification would be less when rates are few. Although that seems to be the future, still single rate would be impractical. There would also be a list of exemptions,” says Foundation for Public Economics and Policy Research director Mahesh Purohit.
Finer description of goods would reduce the scope for disputes between the government and the taxpayer. It would also somewhat thwart the taxpayer’s bid to bring the government to task by wrongfully claiming a tax rate different from what the government intended. Also, in the GST regime, chances of individual states digressing from the rates agreed upon at the national level would be less.
Another area where classification would play a role in policymaking as well as implementation is that of the industry itself. India continues to follow a somewhat old model (evolved in 1987) to classify industries. This at a time technology fast evolves to create new niche areas and hence branch out into stand-alone industries. Consider the recent controversies over Press Note 5 2005 (new avatar of the earlier Press Note 1).
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Companies in sunrise sectors like biotechnology say they face unnecessary hassles because foreign investors need to get the consent of their existing partners in traditional sectors while investing in another company that is too advanced to be bracketed within the same broad classification of industry due to the sophistication of technology used.
One case which is now being investigated by government agencies because of an existing partner’s opposition to its foreign collaborator’s fresh investment in another company is of Paris-based food and dairy products maker Groupe Danone. The diversified Wadia group, which has a joint venture with Danone called Danone-Wadia BSN India Ltd, has opposed the investments Danone’s Daninvest has made in Avesthagen. Daninvest purchased minority stake in Avesthagen in 2006 for product development in bio-nutritionals. Because of the opposition, an investigation into it is pending with the enforcement directorate, an agency that enforces foreign exchange laws. Avesthagen has told ET that its “clinically-validated food products with a therapeutic benefit” should be distinguished from other companies’ “glucose biscuits” so that foreign investors that have a partner in the latter segment do not face a problem while investing in Avesthagen’s highly niche and emerging business.
When asked about the need for a finer distinction of industries for the purpose of deciding whether the existing partner’s consent was required in this context in a dynamic economy, finance ministry officials clarified to ET that industries cannot be re-classified based on “marginal difference” in technology.
“We are not in the same business and, therefore, there is no question of Groupe Danone requiring to take any other party’s consent before investing in us. In fact, there is no research-based company in the entire world that has a strategy or product line of the same nature as we have,” Avesthagen’s vice-chairperson and managing director Villoo Morawala Patell told ET recently.
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Says a finance ministry official: “This is hair-splitting logic. We cannot have numerous classification based on marginal difference in technology. The field officers are not equipped to deal with the finer nuances of latest technology that go into marginally different products in the same class of products. We follow the standard industrial classification that the world follows. Show us where we are behind other nations, we will look into it. We cannot have different dispensation to suit individual companies.”
The guidelines for foreign and technical collaboration defines “same field” of business as per a four-digit national industrial classification of 1987. Perhaps, despite the finance ministry’s assertion to the contrary, we are not keeping pace with the world on this score. The result: unnecessary hardship to foreign investors.
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