The Goods and Service Tax (GST), which is hailed as one of India’s biggest tax reforms came into effect on July 01, 2017. The implementation of GST has impacted almost every sector that is part of the Indian economy, including intellectual properties. The tax rates on some items are linked to their trademark status.

Items for which GST rate is linked to trademark status

The GST rate schedule provides a list of items on which tax under GST will not be applicable. However, the schedule comes with a caveat, wherein some of the items (mostly food items) in this list will attract 5% GST if such items are put in unit container and bears a registered brand name. The items that will attract 5% GST in view of said caveat are listed below.

Under chapter 4 (Dairy produce; bird’s eggs; natural honey; edible products of animal origin, not elsewhere specified):

• Natural honey, chena or paneer 

Under chapter 10 (Cereals):

• All goods, wheat and meslin, rye, barley, oats, Maize (corn), rice, grain sorghum, buckwheat, millet and canary seed; other cereals such as Jawar, Bajra and Ragi 

Under chapter 11 (Products of milling industry; malt; starches; inulin; wheat gluten):

• Cereal groats, meal and pellets; aata, maida, besan, flour of wheat or meslin flour, cereal flours other than of wheat or meslin i.e. maize (corn) flour, rye flour etc.

Under chapter 22 (Beverages, spirit and vinegar):

• Tender coconut water

Under chapter 31 (Fertilisers):

• Tender coconut water

There were confusions generally as to what would be considered as “registered brand name”.  On 5^th of July, the Ministry of Finance issued a statement (presented below) addressing the confusion.

“In this context, the notification… clearly defines ‘registered brand name’ as brand name or trade name, which is registered under the Trade Marks Act, 1999. In this regard, Section 2 (w) read with section 2 (t) of the Trade Marks Act, 1999 provide that a registered trade mark means a trade mark which is actually on the Register of Trade Marks and remaining in force.” “Thus, unless the brand name or trade name is actually on the Register of Trade Marks and is in force under the Trade Marks Act, 1999, CGST rate of 5% will not be applicable on the supply of such goods”

As can be interpreted from the above statement, any listed product that is sold under a trademark, which is registered and remains in force under the Trade Marks Act, will be levied CGST at 5%. For example, there will be no CGST on natural honey sold under a trademark that is not registered. However, natural honey sold under a registered trademark will attract 5% CGST.

Consequence

The items to which this provision applies are basic food items, towards which consumers are highly price sensitive. Hence, the choice for companies, large, medium and small, is to either maintain a registered trademark and have the consumers incur 5% addition cost, or sell under unregistered trademarks. In our view, considering the price sensitive nature of the goods, and consumers in general, the choice for the companies would be obvious. Companies are likely to refrain from applying for trademark registration covering such items, and if they have already registered, then they may apply for cancellation of registration. It has come to our notice that some of the largest players in this sector have applied for cancellation of registration.   

Going forward, we anticipate that trademark applications covering such item will be few and far in between. Also, there will be requests for amendments or cancellation of registered trademarks covering such items.

In the medium to long term, we anticipate increased instances of smaller players introducing such items into the market, bearing trademarks (of course unregistered) that are identical or deceptively similar to large reputed companies. Such activities will dilute the goodwill, and may also negatively impact the reputation of established companies. Such established companies will find it difficult and expensive to stop such players from riding on their goodwill, since enforcing an unregistered trademark is far more complicated compared to enforcing a registered trademark. Although companies may appreciate the risk involved, they would be willing to take this risk considering the pricing pressure discussed earlier. Therefore, in the medium term, we see an increase in trademark litigation in this space.

While we have elaborated on the tentative risks faced by companies, in our view, ordinary consumers are the most exposed. As discussed earlier, there will be relatively more players (as compared to the conditions currently) in the market, trying to ride on the goodwill of reputed companies, and one cannot really expect products of superior quality from such players. Now considering that items of this nature are bought by anyone and everyone, literate and illiterate, there is a high possibility of consumers being deceived into buying such items thinking that it originates from a reputed source. Such confusion is highly undesirable especially in connection with food items, which are brought on a regular basis, and consumed largely on a daily basis.

Conclusion

The Government appears to have introduced the provision of nil GST on some items that are sold under unregistered trademarks to incentivise small traders. However, established companies are positioned to nullify the incentive, and most likely will, by either refraining from applying for trademark registration or cancelling registration. Additionally, the Government’s move may negatively impact the culture of intellectual property protection, which the Government is rigorously trying to foster.

We hope this article was a useful read. 

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