The forty percent demerit slab: scope and litigation risk

A high rate band invites two things: aggressive classification by the department, and aggressive restructuring by taxpayers. Both end in litigation.

Why the boundary is litigated

The difference between the standard rate and the demerit rate is large enough to change the economics of a product line, which means both sides have an incentive to litigate the boundary.

The entries are drafted by description and by tariff heading. A product that answers a demerit description but sits in a different heading, or the reverse, produces exactly the kind of dispute Westinghouse Saxby is cited in.

Beverages illustrate the problem. Whether a drink is an aerated beverage, a fruit based drink, a carbonated fruit drink, a dairy based drink or a nutritional supplement determines the rate, and the same physical product can be described in more than one way.

Vehicles illustrate it differently, because the entries turn on engine capacity, length and fuel type, and a variant that crosses a threshold by a small margin crosses the rate band.

Where the risk concentrates

Beverage manufacturers with a portfolio spanning carbonated, fruit based and dairy based drinks, where a single reclassification affects years of past supplies.

Automobile manufacturers and dealers, where the variant level specification decides the band and where the transition around the change date produced a large number of straddling transactions.

Tobacco and related products, where the compensation cess position and the demerit rate interact and where the transition from cess to rate must be tracked by date.

Luxury goods retail, where the entries are description based and the boundary is genuinely uncertain.

Managing it

Build a product master mapping every stock keeping unit to its heading, its description under the notification and the rate applied, with the date from which each rate was applied.

For any product within ten percent of a threshold specification, hold the technical evidence establishing the specification.

Keep a dated internal note for every classification decision at the boundary; it is what defeats the extended period and the higher penalty.

Reconcile the rate applied against the rate charged by competitors where it is publicly ascertainable, and be prepared to explain a difference.

Do not restructure a product to cross a boundary without documenting the commercial reason for the change; a change made only for the rate is the easiest case for the department.

What to do on Monday

1. Build a stock keeping unit level rate master with the heading, the notification entry and the effective date for each rate.

2. Hold technical evidence for every product near a threshold specification.

3. Write a dated note for each boundary classification decision.

4. Document the commercial reason for any product change that affects the rate band.

Questions we are asked on this

Is the demerit rate a new slab or an existing one?

It is a separate rate applicable to specified entries, alongside the two principal slabs, effective from the notified date.

How do we determine whether our product is within it?

By the entries in the notification, applied through the Tariff heading and the description. A general characterisation of the product as luxury or otherwise is irrelevant.

What happened to compensation cess?

The cess position changed with the rate restructuring from the notified date. Verify what continues to attract cess for the period in question.

Can the department reclassify past supplies into the demerit band?

Within limitation, yes, and that is the principal exposure. A disclosed and reasoned position is the defence.

Is restructuring a product to avoid the band legitimate?

A genuine change in the product is legitimate. A change on paper, or one made only for the rate, invites a demand and a penalty.

In this cluster

• GST 2.0: two slabs did not end classification litigation, they moved the battle line
• Rate change transition: time of supply, credit notes and stock in hand
• Classification disputes under GST: the principles the courts apply
• Westinghouse Saxby: the sole or principal use test and the end of easy classification
• HSN, common parlance and the General Rules of Interpretation
• Composite supply versus mixed supply: the test, and the tax
• Principal supply in bundled contracts: getting the rate right
• Food, beverages and the restaurant service rate maze
• Textiles and apparel: the rate structure and the disputes it produces
• Pharmaceuticals and medical devices: the concession and its boundaries

GST Insights is published by AMLEGALS for general information. Law stated as on 3 September 2026. Not advice on any particular set of facts; not an advertisement or a solicitation under Rule 36 of the Bar Council of India Rules. Readers with a question on their own facts may write to the GST practice of their own accord.