During the Conoavirus Disease 19 pandemic, keeping the hands clean is very important to help prevent the virus from spreading. Germs are everywhere. They can get onto hands and items we touch during daily activities and make us sick. Cleaning hands at key times with soap and water or hand sanitizer that contains at least 60% alcohol is one of the most important steps we can take to avoid getting sick and spreading germs to those around us. Hand sanitizers also may not remove harmful chemicals, such as pesticides and heavy metals like lead.
Taxability of hand sanitizer
The hand sanitizer is also liable to taxable under GST laws. The rate dispute is there for this product. Whether it comes under the Chapter Heading 3808 or 3004? The Appellate Authority for Advance Ruling in ‘IN RE: M/S. WIPRO ENTERPRISES PVT LTD. [2021 (7) TMI 265 - APPELLATE AUTHORITY FOR ADVANCE RULING, KARNATAKA], held that the product falls under the Chapter Heading 3808 and liable to be tax @ 18%.
Facts of the case
The appellant is engaged in the manufacturing and marketing hand sanitizer at a large scale at their various factories primarily to combat the situation arising on account of pandemic COVID – 19. The appellant charged GST @ 18% under HSN 3808.94. The appellant was in the hope that the said goods would fall under HSN 3004 with GST rate of 12%. Therefore he approached the Authority for Advance Ruling seeking ruling on the following questions-
- What is the appropriate classification of the hand sanitizer for the purpose of GST?
- What is the applicable rate of GST?
The Authority for Advance Ruling held that-
- The hand sanitizers are liable to tax under the Heading 3808 under the Customs Tariff Act.
- The hand sanitizers are liable to tax at the rate of 9% under CGST Act and at the rate of 9% under the KGST Act.
The appellant, aggrieved against the findings of the Authority for Advance Ruling filed an appeal before the Appellate Authority for Advance Ruling.
Submissions of the appellant
The appellant submitted the following before the Appellate Authority for Advance Ruing-
- The appellant had obtained a drug licence for the purpose of manufacturing and selling the product alcohol based hand sanitizer.
- The sanitizer contains 95% v/v of ethyl alcohol as per the standard prescribed by the Indian Pharmacopoeia.
- The hand sanitizer is meant for use as an antibacterial gel to keep hands clean and protected having a property to kill 99.99% of gems.
- Chapter Heading 3004 is the most appropriate chapter heading to cover medicaments used for therapeutic or prophylactic value.
- If a product is used for preventing spread of disease, the same would be considered to be of prophylactic use and qualify as a medicament.
- The product in question is undoubtedly anti-infective in nature and hence the same would qualify as a product used for prophylactic use and in turn merits classification as medicament under Chapter Heading 3004.
- The hand sanitizer supplied by them is a product specifically used by living beings for killing bacterial and would clearly fall outside the ambit of disinfectants referred to Chapter Head 3808.
- The goods must be classified on based on the common understanding of the purpose of the product resulting in eliminating any confusion regarding the nature and purpose of the said product.
- The alcohol based hand sanitizer is perceived as a hand-rub medication that kills the germs thereby preventing diseases and hence, the common parlance test results in the said product in question to be classified under the Heading 3004 as a medicament.
- The Director General of Foreign Trade vide Notification No. 08/2015-2020, dated 01.06.2020 has prohibited the exports of products under 4 Headings vide 3004, 3401, 3402 and 3808.94.
- As per Sl. No. 63 in Schedule II of Notification No. 1/2017-Central Tax (Rate), the products covered under the Heading 3004 are subject to tax at a rate of 6% under CGST and SGST respectively.
- The lower Authority’s comparison of the product in question as an alternative to soap has no technical basis as there is no requirement to use water, nor there is a lather in the operating procedure and the outcome of the usage offhand sanitizer.
Analysis and findings by the Appellate Authority
The Appellate Authority for Advance Ruling considered the submissions put forth by the appellant. The issue for determination in this appeal is the classification of the product ‘Alcohol based hand sanitizer’. The Authority for Advance Ruling held that the product is classifiable under Chapter Heading 3808.94. The appellant contended that the product in question falls under Chapter Heading 3004 on account of its characteristics and operating procedure and the fact that they have been granted a licence to manufacture the same in terms of Drugs & Cosmetics Act, 1940.
The Appellate Authority observed that ‘Britannia.com’ defines the expression ‘hand sanitizer’ as a cleansing agent, hand antiseptic, hand rub agents applied to the hands for the purposes of removing common pathogens (disease causing organisms). Hand sanitizers typically come in foam, gel or liquid form. It is employed as a single means of infection control in a wider variety of settings. It can be alcohol based or alcohol free. Since the product manufactured by the appellant is alcohol, the Appellate Authority would be restricted to the discussion o this category of hand sanitizers. The alcohol based hand sanitizers typically contain between 60% to 95% alcohol, usually in the form of ethanol, isopropanol or n-propanol. Alcohol based hand sanitizers have been in use for many decades but its use has mostly been restricted to medical settings such as hospitals and health care facilities. However the onset of COVID – 19 pandemic has popularized the use of hand sanitizer. In the current scenario the use of a hand sanitizer is a recommended and acknowledged method of hand hygiene. India has promoted the use of ethyl alcohol or isopropyl alcohol based hand sanitizers for hand hygiene.
The Appellate Authority further observed that for a product to be classified a s a medicament under Chapter Heading 3004, it is important that the product has either of the two qualities i.e. therapeutic or prophylactic. Even if a product is manufactured using ingredients regulated under the Drugs and Cosmetics Act and according to the formula prescribed in the Pharmacopeia, it cannot be classified as a medicament under the Heading 3004 unless it is meant for therapeutic or prophylactic uses. Its curative or preventive values must be substantial and the product must be manufactured primarily to control or cure a disease and the consumers use it primarily for treatment, mitigation or cure or prevention of specific disease or disorder. The Appellate Authority found that the alcohol based sanitizer does not have either therapeutic or prophylactic properties.
An alcohol based hand sanitizer containing the drug ethanol, is used for preventing the transmission of disease causing germs/bacteria/viruses and this does make it a prophylactic drug. It neither controls the diseases caused by the viruses nor does it develop preventive characteristics insider the human body to fight the disease caused by the viruses/bacteria. It is merely a product recommended for use in hand hygiene practices. Therefore the same cannot be considered as a ‘medicament’ classifiable under Chapter Heading 3004.
The Appellate Authority next considered the submissions of the appellant that they have been issued a license under the Drugs and Cosmetics Act, 1940 for the manufacture and sale of ‘alcohol based hand sanitizer’ for the safe, effective and conform to the quality of standards as prescribed in the Second Schedule of the Act. The regulation under the Drugs Act does not ipso facto mean that the product automatically becomes a medicine. The presence of a drug by itself will not make the impugned product a medicament.
Since the Appellant Authority concluded that the impugned product could not be classified under Chapter Heading 30.04 then it moved on to determine the Chapter Heading under which the product can be classified. The products under Heading 38.08 are divided into the following groups-
- Herbicides, anti-sprouting products, plant growth regulators; and
The Explanatory Notes to the HSN heading 38.08 states that disinfectants are agents which destroy or irreversibly inactive undesirable bacteria, viruses or other micro-organisms, generally on inanimate objects. The use of the phrase ‘generally on inanimate objects’ in the Explanatory Notes does not mean that the product having disinfecting properties which is made suitable for use on human skin is not disinfectant.
The Appellate Authority is not in agreement with the findings of the Authority for Advance Ruling that the impugned product is an alternative to soap. Both ‘hand sanitizer’ and ‘soap and water’ are recommended methods in hand hygiene practices and each method is effective in certain situations.
The appellant tried to get support from DGFT Notification. The classification of goods is to be determined based on the description of the goods given in the First Schedule to the Customs Tariff Act read together with the relevant sections notes and Chapter Notes. The Appellate Authority held that the reference to the ITC HS Code for alcohol based hand sanitizers which has been made in the DGFT Notification is not a standard for interpreting the classification of goods as per the Customs Tariff Act. Therefore the Appellate Authority rejected the contentions of the appellant in this regard.
In regard to the tax on alcohol based hand sanitizer, the goods falling under Chapter Heading 3808attract a tax rate of 9% CGST and 9% SGST in terms of Entry No. 87 of Schedule III of Notification No.11/2017-Central Tax (Rate), dated 28.06.2017. The Appellate Authority also observed that with effect from 14.06.2021 and up to 30.09.2021 the GST rate on hand sanitizer falls under Chapter Heading 3808.94 has been reduced to 5% (2.5% CGST + 2.5% SGST), vide Notification No. 5/2021-Central Tax (Rate), dated 14.06.2021.
The Appellate Authority upheld the findings of the Authority for Advance Ruling and dismissed the appeal filed by the appellant Wipro Enterprises Private Limited.