ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Defining Goods for Indirect Taxes

More statutory definitions for the purpose of classification of goods for indirect taxes will reduce controversies and litigation and consequent uncertainty for industry and business as well as for government finances.

In the process of classification of goods in the tariffs of excise and customs and in sales taxes, that is, all indirect taxes, it is of utmost importance that such terms are used as are not amenable to different interpretations. Experience shows that whenever there are many rates of duty and exemptions, the attempt of the taxpayers is to claim the lower rate of duty. The inevitable result is that they claim that the goods they are dealing in are the ones which are exempted.

How does one define vegetables for the purpose of tax? The question is relevant because vegetables are exempted from sales tax since millions of vegetable sellers on the road and on open land cannot be brought under the tax net. So a seller of coconut claimed that coconut is a vegetable. It went through several tribunals, then the high court and finally landed up at the Supreme Court. Between the three judges in the Supreme Court there was unanimity that it has to be called a vegetable on the basis of how it was known in the market and not how it was known in a botanical sense. But whether coconut was to be treated as vegetable or a fruit was a matter of contention. While two judges said that it was not known as vegetable, the third was not so sure. But he agreed with the other two only on the ground that the burden of proof was on the taxpayer and he had not discharged it by proving that it was indeed known in the market as a vegetable. So the Supreme Court held that it was not a vegetable.1 This example shows that such a simple word as vegetable is not so simple when an item is taxable and is exempted. There are many examples of vegetables such as chilli, lemon,2 ginger,3 betel leaves,4 etc, where the cases were fought up to the Supreme Court and the decision of the apex court was that they were vegetables (except betel leaves) since they were known in the market as such. One of the leading judgments on vegetable was in Canada in 19515 where it was held that “the object of the Excise Tax Act is to raise revenue and for this purposes to class substances according to the general usage and known definitions of trade... It is not the botanist’s conception as to what constitute vegetable, which must govern the interpretation to be placed on the words, but rather what would ordinarily in matters of commerce in a country be included therein. Botanically oranges and lemons are berries, but otherwise no one would consider them so.” So the above case establishes the supremacy of the market definition over the scientific definition.

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