GST Daily

Dear Reader,

Today’s newsletter analytically summarizes the top GST stories reported at?taxmann.com.

Non-submission of reply to SCN can’t be a ground for cancellation of GST Registration: HC

Agarwal Construction Company v. Commissioner of State Tax [2023] 149 taxmann.com 42 (Allahabad)

The petitioner was engaged in the business of civil construction and was registered under GST Act. The GST Department issued a show cause notice directing the petitioner to furnish a reply to the notice within seven working days from the date of service of the notice. The reply was not submitted, and the registration was cancelled by the department. The petitioner filed a writ petition challenging the order whereby GST registration had been cancelled on the ground that it failed to submit a reply to show cause notice.

The Honorable High Court noted that in the instant case, the cancellation order was self-contradictory as in one line, it was stated that the petitioner had submitted his reply to the show cause notice, while in the very next line, it was noted that the petitioner had not submitted a reply to the show cause notice.

Moreover, the Court observed that in the case of Technosum India Pvt. Ltd. v. Union of India [2022] 145 taxmann.com 653 (Allahabad), this Court held that non-submission of reply to show cause can’t be a ground for cancellation of registration. Therefore, the petitioner was also entitled to the same relief, and the cancellation of the registration order was liable to be set aside. The Court also permitted the petitioner to appear before the department along with a reply to show cause notice and directed the department to pass a fresh order in accordance with the law.

The Icy Debate over GST on Ice-Cream!

Jigar Doshi & Yash Goenka - [2023] 149 taxmann.com 35 (Article)

Before indulging in your icy treat, make sure to peruse this document to ensure you're fully informed on the GST rate applicable to your favourite frozen delight.

Introduction

In today's fast-paced world, the food industry has undergone significant transformations in recent years, shifting from traditional restaurants where food is cooked and served on-premises to a variety of new business models such as quick service outlets selling food over the counter, online food ordering platforms and cloud kitchens. These changes represent a fundamental shift in how people consume food, with a growing preference for convenience and speed. As a result, food businesses are adapting and innovating to meet the changing demands of consumers and stay competitive in the industry.

As the food industry undergoes a significant shift in its business model, the government is also attempting to expand the scope of GST to ensure that it remains relevant and effective in capturing the tax liabilities of businesses operating in this sector. Therefore, the government is actively reviewing and updating its policies to keep pace with the evolving food industry.

However, the implications of GST on the food industry are not always well-received. This sector has raised concerns which are often not fully addressed, leading to unresolved doubts regarding the taxability under the GST regime. In this article, we look at the complexities of the GST system and its impact on businesses, particularly those in the restaurant industry.

Authority for Advance Rulings (AAR) on GST on ice cream

A recent advance ruling issued by the Gujarat AAR?HRPL Restaurants (P.) Ltd.,?In re?[2023] 148 taxmann.com 426?regarding the taxability of ice cream sold from restaurant outlets has created a stir in the industry. The authority announced the order on an application filed by Ahmedabad-based HRPL Restaurant, which runs a chain of eating joints. The Authority ruled as under:

• The ice cream sold by the outlets of the applicant is already manufactured, i.e., it is not prepared in their outlets. Therefore, it was held that ice cream sold by the applicant's outlet over the counter would not fall within the ambit of 'restaurant service' and is the supply of goods. Hence, it would attract GST at the rate of 18%.
• The supply of ice cream served as a dessert by the outlets of the Applicant, along with cooked or prepared food, would assume the character of composite supply, wherein the prepared food would be the principal supply, and hence it qualifies as 'restaurant services'. Leviable to GST @ 5% with no input tax credit.
• The supply by restaurants of only pre-packaged ice cream that is readily available and not prepared on-site will be subject to GST at a rate of 18%. This means that even if the ice cream is sold from one of the applicant's outlets, it will be taxed at the same rate as ice cream sold from a standalone ice cream parlour.

Conclusion Based on Ruling

1. Ice cream served at ice cream parlours will attract GST at 18% as it is considered a sale of goods.
2. Ice cream served at restaurants will attract GST based on the nature of the transaction:

a.If sold along with cooked meals, it is considered a composite supply and classified as a restaurant service, taxable at 5% without Input Tax Credit.

b.?If only ice cream is sold, then it would not be a restaurant service and hence taxable @ 18%

The ruling mentioned above regarding the taxation of ice cream in different settings may lead to confusion and misinterpretation, as there are several factors that could impact the taxability of a particular transaction.

Firstly, let's explore the perplexing case of GST, on whether ice creams should be taxed at 5% or 18%.

Since the introduction of GST, there has been some uncertainty regarding the appropriate GST rate for ice cream, as it was unclear whether it should be taxed at 5% or 18%. However, GST Circular 164/19/2021, dated 06th?October 2021, provided clarification regarding GST rates and classification of goods and services based on the recommendations of the 45th GST Council Meeting held on 17th September 2021. The key clarifications provided in this circular specifically pertaining to the food industry, have been discussed below:

• Services by cloud kitchens/ central kitchens by way of cooking and supply of food, even if it is exclusively by way of takeaway or door delivery or through or from any restaurant, are covered under 'Restaurant Service' and attract 5% GST without the input tax credit.
• Supply of already manufactured ice cream by an ice cream parlour, which does not cook/ prepare ice cream for consumption like a restaurant, would qualify as a supply of goods and attract GST at 18% (even if there are certain ingredients of service).

The Circular mentioned above caused confusion within the industry, which has been discussed in detail below.

Analysis under the erstwhile law

Prior to the GST regime, it was evident that the provision of food alone could not be considered a service. The service aspect comes into play with additional features, such as the quality of service, atmosphere, personal attention, etc., that are provided along with the food.

The?Hon'ble Madras High Court, in the case of?Anjappar Chettinad A/C Restaurants?v.?Jt. Commissioner, Office of the Commissioner of GST and Central Excise?[2021] 127 taxmann.com 620/51 GSTL 125?held that:

• The provision of food and drink to be taken away in parcels from a restaurant is tantamount to the sale of food and drink and, thus, shall not attract service tax under the Finance Act.
• Services such as the selection and purchase of ingredients, preparation of ingredients for cooking, and the actual preparation of the food and drinks are not taxable under service tax laws. However, services that are provided from the point of collecting the food and drinks for service at the table until the bill is raised are subject to tax. These services include seating arrangements, ambience, live music and dance performances and the use of fine crockery and cutlery, among others. It is important to note that these services are not applicable in the case of takeaway or food parcels.
• Customers place their orders for food through various channels such as telephone, email, online booking or food delivery platforms like Swiggy or Zomato. After the orders are prepared, they are placed at a separate counter for pick-up by either the customer or delivery service. Typically, take-away counters are situated away from the main dining area and may or may not be air-conditioned.
• Thus, the provision of food and drink to be taken away in parcels by restaurants is tantamount to the sale of food and drink and does not attract service tax under the Finance Act.

Implications under the GST regime

Contrary to the above, the circular took a different approach and provided clarification on the following matter as below:

• Takeaway and door delivery activity form part of restaurant services & thereby, will be taxable at 5% without ITC.
• Supply of ice cream by ice cream parlours would be a supply of goods taxable at 18% as there are no cooking/preparation aspects involved.

Here, it is imperative to note that in situations where a franchise cooks some items on-site and serves them alongside ready-to-eat food procured from the Company, the conflicting implications could exacerbate the issue. It is unclear whether the franchise would be classified as a restaurant subject to tax at a rate of 5%, or whether they would be considered a supplier of goods, regardless of the quantity or price of the cooked and ready-to-eat food as it is not exactly "cooking" the food at its premises in true sense. A lot of restaurants also have central kitchens from where the food is transported to restaurants in a semi-cooked state. Such food is then heated to a minute; processing is done or assembled at the restaurant to be finally served to the customer. Will it be then said that such outlets do not qualify to be a restaurant as they do not cook food and are procuring food from other premises?

Although the GST council could offer clear guidance on the tax treatment for restaurant supplies, there may still be numerous challenges and unanswered questions that we are left to contemplate.

• "What is cooking?" Can heating food in a frying pan, a microwave, or for that matter, putting the icing on a cake be described as cooking? Under the GST regime, the term "restaurant service," which is defined in Notification 11/2017-Central Tax Rate, means the supply of food and beverages by a restaurant, eating joint, or a mess, including the provision of takeaway food or home delivery of food. The GST law does not provide any specific definition of "cooking." The tax authorities are scrutinizing numerous bakeries and food outlets that serve items such as momos, suspecting them of wrongly availing the lower GST rates applicable to restaurants. These establishments are being asked to pay 18% GST instead of the 5% rate they previously used.
• Clarification with regard to the service element in the service of ice cream products at ice cream parlours has not been provided. The possible contention that could arise here would be that seating facility, ambience, cutlery, personal service, etc., can be considered to ensure that activity may be liable at 5% as services instead of goods at 18%. The Circular has classified the takeaway/delivery service as a form of service, although there is no clear interpretation to support this assertion. The delivery aspect cannot be equated with restaurant services, given the extensive range of services that restaurants offer, which are not applicable to take away/delivery services.
• If a restaurant serves ready-to-eat food with tea or coffee that is prepared on-site, would it be considered a composite supply of restaurant service? The tax treatment of this supply would also depend on how the items are billed. If the items are billed together, they would be treated as a restaurant service. However, if they are billed separately, one item would be considered a supply of goods while the other would be considered a supply of restaurant services. This could pose an undue risk to the business due to the knowledge of the person managing the restaurant and billing, as they may not be familiar with the intricacies of GST law.
• Whether resale of food & bakery products fall under restaurant services? When it comes to GST on bakery items, at a glance, the branded snacks sold are taxed at 12%, GST on bread is 0%, pastries/cakes are taxed at 18%, etc. This means that different items have different GST rates. Hence, the final billing in a bakery comes at the consolidated value of all the items purchased. In order to comply with tax regulations, suppliers would be required to maintain a separate HSN code for each product they sell, and the tax implications for each transaction would be dependent on the specific HSN code used. This could result in administrative difficulties as it may be challenging to develop and implement a comprehensive Standard Operating Procedure (SOP) that adequately addresses the tax implications outlined by the Advance Ruling Authority.

The GST provisions do not provide clear guidance on all possible scenarios, which could result in businesses struggling to understand their tax liabilities and compliance requirements. The lack of direct answers to potential questions or issues that may arise from the ruling could create an ocean of doubts and uncertainties for businesses in the food industry, further complicating the GST system for this sector. However, one must note that the classification issues are a complex domain. And while it was believed that these issues may eventually subside in the GST regime, that certainly is not the case.

Especially in the food sector, several advance rulings and disputes have come to the fore on the classification of items such as paratha, roti, chapati, mixed batter, papad, fryums, and flavoured milk, and the list continues. While the Government is constantly trying to resolve classification issues by discussing various items in the GST Council meetings, a lot of them remain unresolved due to the sheer number of items and SKUs. Albeit, it's just been 5 years into GST, the number of litigations or disputes would only increase from here, and the industry could witness a slew of classification-related litigations in the next decade.

That’s it from us for today! Stay Tuned for more updates from?Taxmann.com.

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