India: GST rate on toys: the toy industry has suffered an electronic shock!

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We all enjoyed playing with different “toys” during our childhood and they are still popular with children today. Toys have evolved a lot over time and now manufacturers are adding new features to make toys appealing to children. When someone buys toys, the toys are generally seen by buyers under two categories – “electronic” or “non-electronic”. But how do you determine whether a particular toy is an electronic toy or a non-electronic toy. In general, a toy which is primarily operated by the use of manual force or which must be pushed manually is considered a “non-electronic toy”. And toys powered by the use of electricity or energy generated by batteries, whether rechargeable or replaceable, are considered an “electronic toy”.

Take for example a simple tricycle on which a child sits. To move the tricycle, either the child will step on the pedal or someone will push the cycle from behind and therefore in both situations manual force is applied to move the cycle. While an electronic tricycle will in all likelihood have a rechargeable battery and the child will simply press a button to move the cycle and no physical force is applied here to move the cycle.

It is interesting to note here that electronic toys are charged 18% GST and non-electronic toys are charged 12% GST. The toy industry has always followed the plain language test mentioned above to collect tax on electronic or non-electronic toys. This may not be the right approach anymore! Or at least that’s what the Tamil Nadu Advance Ruling Authority (TN AAR) held in a recent ruling.

The question posed to the TN AAR to determine whether toys with electronic circuits integrated to provide light, music, horns, etc., which are otherwise manually operated, would be taxed as electronic toys at 18% GST or as non-electronic toys at 12% GST. The toys in question were:

  1. Children’s scooter (operated by applying force to the pedals and manual handlebars to change direction. It has light and music in the handlebars.
  2. Activity Ride on – This is a car that has to be pushed from behind and the steering wheel has to be manually manipulated to change direction. The steering has buttons to operate lights and play music.
  3. Smart Tri cycle – This is a tricycle and must be pedaled for movement. The handlebars are used manually to change direction and have buttons for light, horn and music.
  4. Scooter – This is a tricycle to be operated by standing on one leg in the tricycle and pushing with the other leg. The wheels of this tricycle have lights which are operated by induction force when the tricycle is moving.

After reviewing the functionality, applicable notifications and safety instructions mentioned in the brochures relating to these toys, the authority observed that the intention of the law does not appear to consider only electronically powered and actuated toys as “toys”. electronic ”. The authority therefore estimated that even the presence of an electronic circuit for flashlights, music or horn would suffice to classify toys otherwise manually operated as “electronic toys” and therefore taxed at 18%.

Surprised!! Now, that’s the puzzle of the interpretation of the law. One person’s reading and understanding may not always be the same for the other person. And the authorities can sometimes have an absolutely different point of view on the intention of the law. It is also worth noting that in dealing with the matter, the AAR TN also felt that the Plain Language Test may not be considered in all situations. Again, this test has been considered by various courts, including the Supreme Court, to be an important aspect when classifying a product under indirect tax laws.

While one might not agree with the observations or reasons given by TN AAR, the decision will certainly cause an electronic shock to the toy industry if the government does not step in in time by issuing a clarification. appropriate or until the matter is not resolved by higher courts. Amid the uncertainty over the classification created by the decision, one thing is for sure – oblivious to the electric shock that toy makers will experience, children will continue to enjoy their toys, playing music and flashing lights. , as we have all done in the past.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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