We all have enjoyed playing with different ‘Toys' during our childhood and they are popular with children even today. With time, toys have evolved a lot and now a days the manufacturers add newer features to make toys attractive for children. When anyone buy toys, typically the toys are perceived by the buyers under two categories – ‘electronic' or ‘non-electronic'. But how does one determine whether a particular toy is an electronic toy or a non-electronic toy. In general understanding, a toy which is primarily operated by use of manual force or are required to be manually pushed is considered as a ‘non-electronic toy'. And the toys operated by use of electricity or power generated from the batteries, whether chargeable or replaceable are considered as an ‘electronic toy'.
Take for example a simple tri-cycle on which a child is seated. To move the tri-cycle, either the child will push the pedal or someone will push the cycle from behind and hence in both situations manual force is applied to move the cycle. Whereas an electronic tri-cycle will, in all likelihood, have a rechargeable battery and the child will simply press a button to make the cycle move and no physical force is applied here to move the cycle.
It is interesting to note here that the electronic toys are charged with 18% GST and non-electronic toys are charged with 12% GST. The toy industry has always been following the above-mentioned general parlance test to levy the tax on electronic or non-electronic toys. This may not be the right approach anymore! Or at least this what the Tamil Nadu Authority for Advance Ruling (TN AAR) has held in a recent ruling.
The question put forth before the TN AAR for determination was whether the toys with electronic circuits fitted into them for providing 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:
- Children Scooter (operated by applying force on the peddles and manual handle bar to change the direction. It has a light and music in the handle bar.
- Activity Ride on – It is a car which is to be pushed from the back and the steering wheel is to handled manually to change direction. The steering has buttons to operate lights and play music.
- Smart Tri cycle – It is a tri-cycle and has to be pedaled for movement. The handle bar is used manually to change direction and has buttons on it for light, horn and music.
- Kick Scooter – It is a tri-cycle to be operated upon by standing on one leg in the tri cycle and pushing with the other leg. The wheels of this tri-cyle have lights which is operated by the induction force when the tri-cycle moves.
After considering the functionality, applicable notifications and the safety instructions mentioned in the brochures related to such toys the authority observed that intention of the law does not seems to only consider electronically powered and operated toys as ‘electronic toys'. The authority therefore held that even presence of an electronic circuit for flashlights, music or horn will be sufficient to classify the otherwise manually operated toys as ‘electronic toys' and hence taxed at 18%.
Surprised!! Well, that is the interpretation conundrum of the law. One person's reading and understanding may not always be same for the other person. And the authorities may sometimes have an absolutely different perspective on what is the intention of the law. It is also interesting to note that while dealing with the matter, the TN AAR also held that the general parlance test may not be considered in all situations. Again, this test has been considered by various courts including the Supreme Court as an important aspect while classifying a product under the indirect tax laws.
While one may not agree with the observations or reasons given by the TN AAR, the ruling will certainly give an electronic shock to the toys industry if the Government will not intervene in time by way of issuance of an appropriate clarification or till the matter is not settled by the higher courts. Amidst the uncertainty on the classification created by the ruling, one thing is certain - oblivious to the electric shock that the toy manufacturers will get, the children will continue to enjoy their toys, playing the music and flashing the lights, just like we all did in past.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.