Edible oil or cosmetic? Small coconut oil packs pose a big tax question

The seemingly trivial question is close to being answered, after winding through a tax tribunal, a government department, and India's top court for over 15 years. At stake: Heavy taxes and higher prices if the product is labelled a kitchen ingredient, and potential impact on other dual-use products.

On 17 October, the Supreme Court reserved its order on whether coconut oil sold in packs up to 200ml should be taxed as edible oil or a hair care product. While edible oil attracts a goods and services tax (GST) of 5%, it is 18% for hair care products.

A decision favouring such packs as hair care products could prompt manufacturers to raise prices, said Prateek Bansal, a partner at White & Brief Advocates & Solicitors. He said this might impact affordability of smaller packs, and prompt manufacturers to adjust marketing strategies.

“Moreover, the ruling could set a precedent for the classification of other multi-use products," he noted. Such products include olive oil, sesame seed oil, and peanut oil, which are used for both culinary and cosmetic purposes. The judgement could also impact profits for consumer goods manufacturers offering such products.

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The debate dates back to 2009, when the Customs, Excise and Service Tax Appellate Tribunal (Cestat) ruled that small-pack coconut oil should be classified as edible oil under Heading 1513 of the Central Excise Tariff Act. The Revenue Department challenged this, arguing they should be taxed as hair oil under Heading 3305, attracting a higher rate. In 2018, a Supreme Court bench issued a split verdict on the matter, taking the case to a three-judge panel.

The judgement by Chief Justice Sanjiv Khanna and Justices Sanjay Kumar and R. Mahadevan will determine whether packaging and marketing as an edible product influence tax classification.

S.R. Patnaik, partner and head of taxation at Cyril Amarchand Mangaldas, said, “This judgment could have ramifications for the oil industry, particularly for products with dual uses as edible oils and cosmetic items. Companies with pending disputes may face additional tax liabilities if coconut oil in small containers is classified as hair oil."

Industry analysts see a possible upside if the court rules in favour of edible oil classification.

Adhiraj Chand, a former McKinsey analyst, said, “Lower GST (goods and services tax) could make products more affordable, driving demand-led growth and higher purchase volumes. A favourable ruling might unlock growth opportunities for the FMCG sector by setting clearer tax guidelines."

A spokesperson of Marico Ltd, maker of Parachute coconut oil, declined to comment, stating the matter is sub-judice. Bajaj Consumer Care, another coconut oil seller, did not respond to a query.

“Products like coconut oil, which have culinary and cosmetic uses, often face similar classification dilemmas. A ruling clarifying the edible oil classification could reduce disputes for other dual-use products like herbal oils or specialty powders, streamlining compliance for the FMCG sector," concurs Alok Singh, Founder of Diga Organics, a wholesale coconut oil company.

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Jasmine Damkewala, a senior partner at Circle of Counsels and Advocate-on-Record at the Supreme Court, said that packaging plays a crucial role in determining classification. Oils in containers under 50ml are generally considered hair care products, especially if labelled for beauty or skincare, Damkewala said. Cosmetic oils also tend to contain additives, such as fragrances, distinguishing them from food-grade oils. Certification for hair care compliance under the Cosmetic Rules, 2020, further differentiates them from edible products.

Madhan Agro markets its edible coconut oil in large containers under the Shanthi brand, and Marico, known for its Parachute brand, are closely watching the outcome.

The government stands to gain significant revenue from a ruling if small-pack coconut oil is re-classified as hair oil.

Supreme Court lawyer Tushar Kumar said, “A ruling classifying small-container coconut oil as hair oil could generate substantial additional revenue. This case goes beyond the coconut oil industry, potentially impacting how other dual-use products are taxed under GST, shaping future tax policy and legal interpretations." According to Patnaik, if such packs are labelled as edible oil, the government risks forgoing substantial revenue.

India has seen similar tax classification disputes over products such as biscuits, talcum powder, and medicated toothpaste.

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In January this year, the Delhi High Court ruled that Amway’s coconut oil, marketed as a hair product, does not qualify as edible oil under the Delhi Value Added Tax Act, 2004 (DVAT Act). Similarly, last month, the Rajasthan Bench of the GST Authority for Advance Rulings (AAR) declined to classify softy ice cream as a milk product, noting that sugar, not milk, is the primary ingredient, thus attracting an 18% GST instead of the 5% rate for milk products.

"Prima facie, the issue concerns the taxation of two distinct uses of the same commodity under separate tax slabs. However, it also involves taxation, consumer interests, and public health. For internal consumption of coconut oil, stricter FSSAI (Food Safety and Standards Authority of India) regulations, licences, and packaging requirements would apply, unlike external use, where only manufacturing licence details are necessary," observes advocate Rouble Chhabra, FMCG expert, at Rastogi Chambers.