Tax Vista Your weekly tax recap Edn. 269 - 5th January 2026 Kasi Viswanathan V

 

 

Reinventing the Manufacture Wheel under GST

The issue before the Gujarat High Court was whether non-fermented, non-liquored crushed tobacco leaves packed in small retail pouches are classifiable under Tariff Heading 2403 as "chewing tobacco", as contended by the Revenue, or under Tariff Heading 2401 as "unmanufactured tobacco", as claimed by the petitioners. The classification has significant consequences for the levy of compensation cess, excise duty, and NCCD.

 

The undisputed facts are that the petitioners are only carrying out the process of repacking as done by cutting, sieving unmanufactured tobacco and repack the same without adding any other ingredients. The Chapter Note to the Central Excise Tariff contains a deeming provision which treats repacking from bulk to retail packs as "manufacture" in relation to products falling under Headings 2401, 2402 or 2403.

 

The petitioners relied on CBEC Circular No. F. No. 81/5/87-CX.3 dated 23.06.1987, which clarified that unmanufactured tobacco merely broken by beating, sieved, and packed in retail packets (with or without a brand name) for consumption as chewing tobacco commonly known as "zarda" would remain classifiable under Heading 2401 as "unmanufactured tobacco". The petitioners also placed reliance on Tribunal decision in the one of the petitioner's own case under the central excise regime (2024-VIL-544-CESTAT-AHM-CE), where it was held that the product continued to fall under CTH 2401 and could not be classified under CTH 2403 merely because it was consumed as chewing tobacco. The petitioners further relied on CRCL reports establishing that the bulk product received and the final product packed in retail pouches were identical, accordingly there is no manufacture. It was also argued that consumption method (as chewing tobacco) cannot determine tariff classification.

 

Reference was made to the Explanatory Notes to the HSN (2017 Edition), which includes "chewing tobacco, usually highly fermented and liquored" under Heading 2403. On this basis, the petitioners contended that tobacco leaves must undergo processes such as fermentation and liquoring to qualify as "manufactured tobacco". The Revenue, however, emphasized that the use of the word "usually" indicates that it is not necessary.

 

The Revenue placed reliance on the definition of "manufacture" under section 2(72) of the CGST Act, contending that the definition places emphasis on use of the product as a deciding factor for manufacturing. It was argued that all three parameters in the definition stand satisfied in the present case, namely:

 

(a) Distinct character: The raw material undergoes processing by way of drying, cutting and packing.

(b) Distinct name: The disputed product is registered under a brand name - chewing Tobacco (under the Trademark Act, 1999)

(c) Distinct use: The product description itself specifies that it is meant for consumption by chewing.

 

Accordingly, the product was claimed to be manufactured tobacco classifiable under CTH 2403. The Revenue further submitted that, notwithstanding similar tariff structures under customs and excise, the GST regime introduces comprehensive definitions and an end-use focus which override the earlier process-centric approach under central excise.

 

The High Court observed that the definition of "manufacture" under section 2(72) of the CGST Act differs from that under section 2(f) of the Central Excise Act. It noted that the GST definition refers to processing of raw materials or inputs "in any manner". The Court held that tobacco leaves packed in gunny bags cannot be used for chewing unless the same is processed for the purpose of making it suitable for "chewing" by packing in small retail pouches. The Court also noted that the petitioners were branding these retail pouches for chewing purpose. On this basis, it concluded that the retail packs acquired a distinct name, character and use, thereby partaking the character of "chewing tobacco". Reference was also made to the Cigarettes and Other Tobacco Products Act, 2003 (COTPA) to support this conclusion. The classification under CTH 24039910 was accordingly upheld. However, the Court agreed that invocation of the extended period was not justified and restricted the demand to the normal period under section 73.

 

The decision raises several issues for consideration. One key question is whether the definition of "manufacture" under the CGST Act applies to the expression "manufacture" used in rate notifications. While the original Notification No. 1/2017-Central Tax (Rate) did not expressly borrow definitions from the Act, Explanation (v) was inserted with effect from 29.09.2023 to provide that undefined terms in the notification shall have the meanings assigned in the GST Acts. Even otherwise, "manufacture" is a nomen juris, and a substantial part of its statutory definition traces back to the classic decision in Delhi Cloth and General Mills Co. Ltd. (1962-VIL-01-SC-CE). The decision in-turn referred to Judicial meaning of word 'manufacture' as under:

 

"This distinction is well brought about in a passage thus quoted in Permanent Edition of Words and Phrases, Vol. 26, from an American judgment. The passage runs thus:-

Manufacture implies a change, but every change is not manufacture and yet every change of an article is the result of treatment, labour and manipulation. But something more is necessary and there must be transformation; a new and different article must emerge having a distinctive name, character or use."

 

The above has been repeatedly affirmed in subsequent decisions, including Pan Pipes Resplendents Ltd. (2005-VIL-206-SC-CE). Accordingly, there is little difficulty in applying the CGST Act definition of manufacture to the term as used in the notification.

 

However, the rate notification does not rely solely on the description of goods in column (3); it equally hinges on the tariff item, sub-heading, heading or chapter specified in column (2), which is expressly linked to the First Schedule to the Customs Tariff Act, 1975 by the explanation to the rate notification. While the product may satisfy the description in column (3) as "other manufactured tobacco" by applying the GST definition of manufacture, it must independently meet the test of classification under CTH 2403 as per the Customs Tariff. This distinction is significant because, under the central excise regime, even where repacking was deemed to be manufacture by virtue of a chapter note for the purpose of levy of excise duty, the classification continued to remain under CTH 2401. The present approach therefore results in the same product falling under different tariff headings, notwithstanding alignment with the HSN. Such an outcome is undesirable, particularly for a product that continues to attract levy under both the GST and excise frameworks [2025-VIL-1358-GUJ]

 

GSTN Portal - Advisories:

 

1. GSTN to tighten the system-based controls on reclaimed ITC and RCM ITC

As per the GSTN Advisory dated 29.12.2025, although information has so far been made available through the Electronic Credit Reversal and Re-claimed Statement (Reclaim Ledger) and the RCM Liability/ITC Statement (RCM Ledger), only warning messages were generated in cases of excess claim or re-claim beyond the available balances. GSTN is now set to introduce additional system-based validations, as summarised below:

 

(a) Control on reclaimed ITC [Table 4(D)(1) of GSTR-3B]

The amount of ITC reclaimed in Table 4(D)(1) shall be restricted to an amount not exceeding the combined value of:

 

(i) the closing balance available in the Reclaim ledger, and

(ii) the ITC reversed in Table 4(B)(2) of the current period GSTR-3B.

 

Where the ITC reclaimed exceeds the above permissible limit, the excess amount shall be mandatorily reversed in Table 4(B)(2) of the current GSTR-3B. If sufficient ITC balance is not available for such reversal, the shortfall shall be added to the tax liability of the current GSTR-3B.

 

(b) Control on RCM ITC [Tables 4(A)(2) and 4(A)(3) of GSTR-3B]

ITC claimed under RCM in Tables 4(A)(2) and 4(A)(3) shall be restricted to an amount not exceeding the combined value of:

 

(i) RCM liability paid in Table 3.1(d) of the same GSTR-3B, and

(ii) the closing balance available in RCM ledger.

 

Where the RCM ITC claimed exceeds the above permissible limit, then the taxpayer will be required to either pay the additional RCM liability or to correspondingly reduce the ITC claimed in Tables 4(A)(2) or 4(A)(3).

 

[GSTN: Advisory & FAQ on Electronic Credit Reversal and Re-claimed Statement & RCM Liability/ITC Statement dated 29.12.2025]

 

(The views expressed are personal. The author can be reached for feedback or queries on v.k.vishwa@gmail.com)