Last reviewed: 10 September 2026. GST 2.0 took effect on 22 September 2025, replacing the earlier four-slab structure of 5%, 12%, 18% and 28% with two principal slabs — 5% and 18% — and a residual 40% slab reserved for sin and luxury goods. The rationalisation genuinely resolved several long-running rate anomalies overnight, and many businesses assumed classification disputes would quietly fade away with it. They have not: wherever a product can plausibly be described under more than one HSN heading with a different rate outcome, show-cause notices, audit queries and Advance Authority for Advance Ruling (AAR) references continue to arrive, often months after the relevant invoices were already raised at what the seller believed was the correct rate.
Why classification disputes survive GST 2.0
It helps to be precise about what GST 2.0 actually did. It collapsed the number of slabs a product could be assigned to, which removed a category of dispute that existed purely because two adjacent slabs (say 12% and 18%) sat close together and businesses had an incentive to argue for the lower one on marginal facts. What GST 2.0 did not do is rewrite the underlying classification scheme — the Customs Tariff-based HSN (Harmonised System of Nomenclature) headings and sub-headings that every supply must still be slotted into remain exactly as detailed as before. A product can still sit at the boundary between a heading that attracts 5% and one that attracts 18%, and that boundary is where disputes are born. If anything, because the rate difference between the two surviving principal slabs (5% and 18%) is now wider than some of the old adjacent-slab gaps, the revenue stake in getting classification “wrong” either way has gone up for high-volume sellers.
The legal test: HSN description and trade parlance, not your invoice
The settled position — reaffirmed repeatedly by Advance Ruling Authorities and higher courts across VAT, excise and now GST jurisprudence — is that classification is decided by matching the product against the HSN entry description, read together with the General Rules of Interpretation, and where the entry itself is ambiguous, by how the product is commonly understood in the trade (the “common parlance” test). What a seller chooses to print on the invoice, or what marketing calls the product, may carry some persuasive value but is never conclusive. Two further sub-principles matter in practice. First, the degree of processing matters: a product that is “ready to eat” or has undergone value-addition (cooking, roasting, flavouring, packaging as a branded snack) can be pushed out of a concessional entry meant for a basic, unprocessed staple, even if the raw ingredients are identical. Second, added ingredients or flavouring can change the character of the product for classification purposes even when the base commodity is the same.
Two live examples that show the pattern
The parota/parotta dispute is the clearest illustration. Taxpayers argued that a parota is functionally similar to roti or chapatti and should attract the same concessional 5% rate applicable to basic food staples. Advance Ruling Authorities have instead held that a parota is a distinct preparation — requiring additional processing (multiple layers, cooking with fat, sometimes pre-cooking and freezing for retail sale) — and is therefore not the same commodity as roti/chapatti for rate purposes, attracting the higher rate applicable to prepared food. The popcorn dispute follows a similar arc but shows how the answer can shift over time and with presentation: whether ready-to-eat or flavoured popcorn is treated as a “namkeen” (savoury snack, one rate) or as a distinct commodity has seen shifting AAR positions both before and after recent rate changes, turning partly on flavouring, packaging and how the product is marketed. Neither case is unique to food — the same basic-vs-processed, generic-vs-branded fault line recurs in textiles (yarn vs made-up articles), footwear (components vs finished product) and several FMCG categories.
Where the fault lines typically run
The table below summarises the pattern across the categories where classification disputes have proved most persistent, both before and after GST 2.0. It is illustrative of the type of fault line, not an exhaustive list of rates, since rate schedules should always be checked against the current notification for the specific HSN code in question.
| Category | Lower-rate claim | Revenue's typical counter-view | Deciding factor |
|---|---|---|---|
| Food staples vs prepared food | “It's still basically roti/a basic grain preparation” | Additional processing/layering creates a distinct, higher-rate product | Degree of processing and common trade parlance |
| Namkeen/snacks vs a distinct new category | “It's a traditional namkeen, taxed accordingly” | Flavouring/packaging/branding makes it a different commodity | Ingredients, flavouring, and how the trade describes it |
| Raw/basic textile vs made-up article | “It's just fabric/yarn at the basic rate” | Stitching, cutting or finishing creates a “made-up” article | Extent of further processing before sale |
| Generic vs branded/packaged goods | “Same product, generic rate applies” | Branding and unit packaging can attract a different entry | Whether the product is put up in a unit container bearing a brand name |
Worked example: what a wrong classification call actually costs
Assume a packaged snack manufacturer has been classifying a new flavoured product under an HSN heading attracting 5%, on the view that it is a traditional namkeen. Over eighteen months the company invoices ₹8 crore of sales of this product at 5% GST (₹40 lakh output tax collected and paid). On audit, the department takes the view — consistent with the shifting AAR position on flavoured/processed snacks — that the product is properly classifiable under a heading attracting 18%, on the ground that the added flavouring and processing take it out of the basic namkeen entry. The recomputed liability is ₹8 crore × 18% = ₹1.44 crore. After deducting the ₹40 lakh already paid, the differential demand is ₹1.04 crore, to which the department typically adds interest under Section 50 (currently running at 18% per annum from the original due date of each return) and, where a show-cause notice alleges the classification was not merely a bona fide error, a penalty that can range up to 100% of the tax short-paid under Section 74/74A where suppression or wilful misstatement is alleged, or a lower penalty under Section 73 where it is treated as a bona fide dispute. Even at the lower end, the exposure on an eighteen-month sales run easily exceeds ₹1.3–1.5 crore once interest is added — and because GST returns are self-assessed, the department can reach back across the full period the classification was used, not just from the date of the notice.
Common mistakes and red flags
- Classifying a new or reformulated product by analogy to a similar-sounding existing product, without checking the specific HSN entry and its exclusions.
- Treating a favourable AAR ruling obtained by a different applicant, for a similar but not identical product, as binding on your own business — an AAR ruling binds only the applicant and the jurisdictional officer for that applicant.
- Changing the recipe, processing method or packaging of a product without re-checking whether the classification (and therefore the rate) still holds.
- Scaling up sales volume at a self-assessed lower rate on a genuinely debatable product before validating the position, rather than after.
- Assuming GST 2.0's slab merger automatically resolved a pre-existing classification dispute for your specific product — the merger changed which slab applies to a given heading, not which heading your product falls under.
- Not documenting the technical/commercial basis (ingredients, process flow, trade understanding) for the classification adopted, which becomes critical evidence if the position is later challenged.
What should you do now
For any product where classification is genuinely arguable — meaning a reasonably informed competitor or tax officer could credibly argue for a different HSN heading — the practical discipline is to resolve the question before volume builds up, not after. An Advance Ruling under Section 97 gives a binding answer for your own GSTIN and is the most defensible route for a product that is about to be launched or scaled. Where volumes are already significant and no ruling has been sought, a documented internal classification memo — covering the HSN entry relied on, the process/ingredient basis, and any comparable rulings considered — at least demonstrates that the position was taken in good faith rather than carelessly, which matters for the question of penalty even if the classification is eventually overturned. Businesses that manufacture or sell food, FMCG, textile or similar products with a basic-vs-processed rate distinction should build a periodic review into their compliance calendar, since AAR positions on categories like flavoured snacks have already shown they can shift, and a classification that was defensible last year may need re-checking this year.
Frequently asked questions
Did GST 2.0 remove classification disputes entirely?
No. GST 2.0, effective 22 September 2025, reduced the number of rate slabs to mainly 5% and 18% (with a 40% slab for sin/luxury goods), which resolved some disputes caused by narrow gaps between adjacent slabs. It did not change the underlying HSN classification scheme, so products that can plausibly sit under more than one heading continue to be disputed.
Is a parota taxed the same as roti under GST?
Advance Ruling Authorities have held that a parota is a distinct, further-processed preparation and is not the same commodity as roti/chapatti for the concessional food-staple rate, so it has been held to attract a higher rate. Businesses selling similar prepared-food products should check their specific product against current rulings rather than assuming parity with basic staples.
How is a product's GST rate legally decided if the description is ambiguous?
Classification is decided by matching the product to its Customs Tariff/HSN heading description, applying the General Rules of Interpretation, and where the entry remains ambiguous, by common trade parlance — how the product is generally understood in the trade — rather than by the seller's own invoice description or marketing label.
What is the benefit of getting an Advance Ruling before launching a product?
An Advance Ruling under Section 97 gives a binding classification (and rate) determination specific to the applicant's GSTIN before large sales volumes accumulate. If the classification is later found incorrect without a ruling, demand, interest and penalty can apply retrospectively across the entire period the wrong rate was used; a ruling taken in good faith materially reduces that exposure and provides certainty going forward.
Can the department demand tax retrospectively if my classification turns out to be wrong?
Yes. GST is a self-assessment tax, so if an audit, notice or investigation finds that a different HSN heading and rate should have applied, the department can raise a demand for the shortfall for the entire period the incorrect classification was used, along with interest under Section 50 and, depending on whether the case is treated as a bona fide error or as suppression/misstatement, a penalty under Section 73 or Section 74/74A.
Does an Advance Ruling obtained by another company protect my business?
No. An Advance Ruling binds only the applicant who sought it and the jurisdictional tax officer in relation to that applicant's supplies. It can be persuasive evidence of a reasonable industry view if your product is genuinely identical, but it does not bind your own assessment, so businesses with a similar but not identical product should still consider seeking their own ruling.
GST AdvisoryGST Notice HandlingTalk to us
This article is general information for educational purposes, not an opinion on any specific case or a substitute for professional advice; the legal position summarised here can change, so please verify current status and consult a qualified professional before acting on your own facts.