GST: The midnight tryst with tax and trademarks

Tagging branded products with a levy while keeping non-registered brands out could be discriminatory

The single window tax regime intended to simplify processes under the Goods and Services Tax (GST) is facing many challenges in its interpretation and implementation. More significantly, transition to GST, despite adequate time given, appears to be in the midst of birthing angst. 

Serendipitous stories such as that of India Gate basmati rice and its exemption from GST have been taken as a silver lining in a not quite dark cloud by some, but set the alarm bells ringing amongst others. The issue at hand is simply this: The exemptions set out (under Notification No.2/2017 dated 28.06.2017 of the Ministry of Finance) from the five per cent slab imposed on branded and packaged rice (Entry 70) implies that a popular brand, if it has failed to register (for a variety of reasons) thus far, escapes the net. This is for most food items listed in the notification and not just for rice. Vigilant brands who ensured due and proper registration and perpetuation of their trademarks are feeling short changed by this, as they believe many exempted labels would enjoy an unfair advantage. The rationale, which appears to be well-intentioned i.e., to keep non-branded goods at low cost appears to have had unintentional consequences. Whilst the master-stroke of GST takes roots, law makers may have to ensure against such inadvertent disparities. 

Trademarks under GST

Trademarks as brand distinguishers are a tried and tested business strategy. And if it weren’t for the current scenario every practitioner worth his salt would strongly advise clients to promptly protect their brands through registration. 

The present notification has drawn on the Trade Marks Act, 1999 (“Trademark Act”) to qualify a brand name. The benefits including of expeditious action for infringement, protection at borders and monopoly, at least within specified categories are merely some of the benefits of registration.

There is reasonable apprehension now that the GST distinguisher could lead tried and tested business models relying on brand-building to rethink strategies. Cancelling a registration or not registering at all may not be the best alternative. 

What are the implications of the exemption? 

From the government’s perspective, whilst the rationale for not taxing non-branded food articles holds water, it may be expedient to review the complexities inherent in taxing registered trademarks. 

Firstly, the five per cent central GST (CGST) is being imposed on two parameters:

•  One that goods be packaged in unit containers and 

•  Two, they are branded with registered trademarks

Hence, mere packaging does not attract the applicable tax. Brand registration takes primacy and the trademark has to be in the Indian Register. 

The rationale of keeping only non-branded items out of GST loses meaning when the above categorisation is applied, as several brands would still escape the tax net whilst enjoying the benefit of being packaged branded goods. Trademarks at a preliminary stage of filing and those which have not been renewed, as in the case of ‘India Gate’, are both exempted. The goods are still packaged with brand names. 

Specifying the requirement of compliance with the Indian Trademark Act also creates a further qualifier that foreign brands, registered outside India and not under the Trademarks Act, are exempted from GST. However, if such foreign brands have opted for international filing (Madrid Protocol), these have to be entered into the Indian Register. But if the international filing is under Madrid Agreement, to which India is not a signatory, inadvertently such brands may also enjoy the exemption. The notification takes into account Indian and foreign brands whilst missing those enjoying the benefit of branding and packaging, but are not registered. The objection by most brand owners that the categorisation is discriminatory becomes sustainable. 

Way Forward

If the notification were to stay, food brands may be left with no option but to either drop pending registration of brand names or seek cancellation. In such instances, whilst the thrust for adapting to Intellectual Property (IP) regimes will not be impacted, it will certainly affect trademark filings in select categories. For brands, the primary impact will be in the ease of enforcement a registered trademark allows, especially when applied to enforcement at borders to prevent counterfeit products.

If the government were to review the notification, there is a strong possibility that the dual requirement of packaging in unit containers with registered brand names will be modified to ‘packaged goods’ attracting applicable GST. This move may definitely not be what the industry would want but would certainly remove inconsistencies in pricing . 

The review mechanism ideally ought to take note of the rationale for including the distinguisher, reviewing on the basis of the impact on IP policies alone may not be expedient though it would not be completely incongruous. Finally, review or revision by removing or exempting in full all branded items may not be an elitist move, as the markets would ultimately drive competition and demand. That the notification and the distinguisher will be reviewed appears inevitable. 

Opening up the maze

• Under GST, food companies  may drop pending registration of brand names thanks to a notification that allows food products to escape the tax net if not registered

•  Both national and international brands will be impacted if the international filing is under an agreement to which India is not a signatory

•  Possibly the exemptions have been done to ensure affordability, removing or reviewing it may not be elitist  as markets would ultimately drive competition and demand

 The writer is a practising advocate at the Supreme Court of India & Bombay High Court and author of “Technology Laws Decoded.”