Lack of Authority by Tax Research Unit: Delhi High Court Quashes Circular on GST Classification of Polypropylene Bags

In a significant ruling that affects manufacturers and processors in the technical textiles industry, the Delhi High Court today struck down a controversial circular regarding the Goods and Services Tax (GST) classification of polypropylene woven and non-woven bags. The judgment, pronounced by a bench comprising Hon’ble Mr. Justice Yashwant Varma and Hon’ble Mr. Justice Dharmesh Sharma, addressed the contentious issue of whether these items should be classified under plastic goods or textiles for GST purposes.

The court observed that the circular, dated December 31, 2018, issued by the Tax Research Unit (TRU) lacked proper statutory backing. “No authority vested in the TRU to issue the clarification impugned before us,” the bench stated, highlighting a crucial aspect of judicial authority under the Central Goods & Services Tax Act, 2017.

The petition, filed by the Association of Technical Textiles Manufacturers and Processors, challenged the TRU’s circular which classified polypropylene bags under ‘plastics,’ arguing that these materials should be regarded as textiles, significantly affecting their GST rates.

The Court meticulously dissected the legal framework, noting that, “The impugned circular also fails to advert to the Notes placed in Chapter 39, and which in unambiguous terms, exclude textiles from the ambit thereof.” This observation was pivotal in the Court’s decision, emphasizing the necessity for accurate and lawful classification in the GST regime.

While the Court refrained from making a definitive statement on the classification of the materials, citing the need for comprehensive material and consideration of industry-wide ramifications, it left the issue open for competent authority. “Courts should avoid expressing an opinion on questions of classification unless they are directly raised and adequate and cogent material placed on the record,” the judgment read, underlining the court’s cautious approach in matters of significant economic impact.

The decision was met with relief by the petitioners and is expected to have substantial repercussions for the technical textiles industry. The ruling underscores the importance of statutory authority and proper procedure in the issuance of directives under the GST framework, setting a precedent for future classification disputes.

Representatives for both parties, including Mr. V. Lakshmikumaran and Mr. Kunal Kapoor for the petitioners, and a team led by Ms. Shubhra Parashar for the respondents, presented their arguments in a case that has been closely watched by industry experts and tax professionals alike.

The quashing of the circular dated December 31, 2018, marks a significant moment in the interpretation and application of GST law, particularly in the realm of manufacturing and taxation classification.

Date of Decision: 16 November 2023

ASSOCIATION OF TECHNICAL TEXTILES MANUFACTURERS AND PROCESSORS & ANR. VS UNION OF INDIA & ORS