Coconut Oil Taxation in India

Context : 

For over 15 years, the classification of coconut oil under India's tax regime—whether as an edible oil or a haircare product—remained unresolved. This ambiguity led to varied interpretations, disputes, and higher tax rates for certain uses.

On December 18, 2024, the Supreme Court of India delivered a landmark verdict, classifying coconut oil as an edible oil and applying a lower GST rate of 5%, compared to 18% for haircare products. The decision was based on coconut oil's predominant use as a cooking medium, particularly when sold in small quantities.

Coconut Oil Taxation in India: Key Points

Historical Taxation

1. Pre-GST Era (CET Act, 1985)

   • Edible Oil Classification: Taxed at 8% under “Animal or Vegetable Fats and Oils.”
   • Haircare Classification: Taxed at 16% under “Preparations for use on the hair.”
   • HSN Norms: Followed international Harmonised System of Nomenclature (HSN) guidelines.

2. 2009 CBEC Circular

   • Classified coconut oil in containers under 200 ml as hair oil, taxed at 16%.
   • 2015 Withdrawal: Circular rescinded after court rulings emphasized usage over packaging size.

3. GST Era (2017 Onwards)

   • Edible Oils: Taxed at 5%.
   • Haircare Products: Taxed at 18%.

Legal Disputes and Challenges

1. 2007 Madhan Agro Case

   • Issue: Central Excise authorities issued notices proposing a higher tax rate by classifying coconut oil as a haircare product.
   • CESTAT Ruling: Declared coconut oil as edible oil based on predominant use, ignoring packaging size.

2. Similar Cases

   • Producers in Puducherry faced similar disputes. CESTAT ruled in favor of edible oil classification.
   • Appeals by tax authorities reached the Supreme Court.

Supreme Court Verdicts

1. 2018 Split Verdict

   • Justice Ranjan Gogoi: Supported edible oil classification regardless of packaging.
   • Justice R. Banumathi: Applied the “Common Parlance Test,” linking small packages to hair oil perception.

2. 2024 Final Ruling

   • Bench Composition: Chief Justice Sanjiv Khanna, Justice Sanjay Kumar, Justice R Mahadevan.
   • Key Highlights:
     • Rejection of Common Parlance Test: Deemed unnecessary since coconut oil is clearly defined in legal and HSN norms.
     • Legal Headings Prevail: Coconut oil’s dual use (edible and haircare) doesn’t disqualify it from the edible oil category.
     • Packaging Size: Declared irrelevant, as small containers are common for both edible oils and hair oils.

Conclusion

The Supreme Court's 2024 ruling resolves a long-standing ambiguity in India's tax regime, ensuring coconut oil is classified and taxed as edible oil at 5% GST. This decision aligns taxation with legal norms and coconut oil’s primary use, providing clarity and consistency for producers and consumers alike.