Chemistry of curd to physics of paratha, GST rates on food are a multi-disciplinary tangle

Issue of GST on food items is in news again after hotel owner’s viral interaction with Finance Minister Sitharaman last week. But complexities highlighted go back further in time.

Illustration: Shruti Naithani | ThePrint

New Delhi: What’s the difference between a roti and a paratha? Is yoghurt different from curd? Are papad and fryums really all that different? No, these aren’t off-brand philosophy questions, but rather all-too-real vexatious tax issues under India’s Goods and Services Tax (GST) regime.

The issue of GST on food items made headlines, again, following an interaction last week between Union Finance Minister Nirmala Sitharaman and stakeholders in Coimbatore. During the interaction, the owner of a restaurant chain appealed to her to look into diverse GST rates applied on different food items that can often appear on the same bill. 

“There is 5 percent GST on sweets but 12 percent on savouries,” Sreenivasan, owner of Sree Annapoorna Sree Gowrishankar Hotels, lamented. “There is 18 percent GST on cream-filled buns, whereas there is no GST on buns.”

“Customers often complain, saying, ‘just give me the bun, I will add the cream and jam myself’,” he added, to much laughter from other industry stakeholders and Sitharaman herself.

But the issue is far from a laughing matter, with many restaurants across the country receiving tax demands and notices from the GST authorities for under-charging and under-paying due to confusion over issues like these. 

As the system stands today, understanding GST rates on food items would require bringing together elements from various courses taught in universities—marketing and public policy to physics, chemistry, economics. 

Location, location, location…

The core of the issue is where and how the food items are sold. 

Any food or drink, with the exception of alcoholic drinks, served in a normal restaurant attracts a GST of 5 percent. However, if the food or drink is served in a restaurant that is within a hotel that charges room rates of Rs 7,500 a night or more, the GST rate would be 18 percent. If the room rate is less than Rs 7,500 a night, the GST rate would be 5 percent, as with any other restaurant. 

So, the issue raised by Sreenivasan wouldn’t exist if he was talking about food sold at his restaurants for consumption then and there—all of it would attract a uniform 5 percent GST. But not all restaurants limit themselves to just that. Many also incorporate in-restaurant stores where pre-packaged food items can be purchased, and therein lies further complexity.

For instance, if you were to eat a paratha at the restaurant, you would be charged a GST of 5 percent (unless it was in a restaurant inside a relatively expensive hotel). Yet, if you bought a pre-packaged packet of those same parathas from the in-restaurant store on your way out, you would pay 18 percent GST.

In reply to Sreenivasan’s comments last week, Sitharaman had said that complexities in GST on food items would be looked into as part of a broader review underway on the scope for rationalising GST rates overall.

When physics & chemistry enter tax matters

Incidentally, believe it or not, there’s also a factor of physics and food chemistry that comes into play in GST rate classifications. 

For example, a packet of rotis or chapatis attracts a GST rate of 5 percent while a packet of parathas, even plain ones, will be taxed at 18 percent. Why? Because they are chemically different and one needs heat to be edible, while the other doesn’t. The matter was discussed in extensive detail by GST authorities in Gujarat in 2021 and 2022. The Gujarat Authority for Advance Ruling (AAR) in 2021, in response to an application, passed an order that chapatis and parathas were different for the purposes of GST.

State AARs are legally constituted bodies that can deliver binding rulings on applicability of GST rates on any given good or service. These rulings can be appealed in each state’s Appellate Authority for Advance Ruling (AAAR). 

The roti-paratha matter was appealed, and Gujarat’s AAAR had to examine the matter in 2022. 

What the AAAR found was that the packaging on paratha packets said that it takes 3-4 minutes to heat the parathas for them to change colour and be fit for human consumption. Rotis and chapatis, on the other hand, can be eaten right out of the packet. So, it ruled that packaged parathas would be taxed at 18 percent and packaged rotis at 5 percent.

The interplay of packaging and physics even affects something as ubiquitous and essential as water. Normal, unpackaged water attracts no GST. Yet, if it’s sold in a bottle smaller than 20 litres in size, it attracts 18 percent GST. If the bottle is 20 litres or larger, the rate is 12 percent. 

There also seems to be some variation when it comes to the temperature of water. If you cool water before selling it—to the point that it becomes ice or snow—it would be taxed at 5 percent. Yet, if you heat it till it becomes steam, however you manage to sell it, it is taxed at 12 percent. 

What bacteria did you use, anyway?

According to tax experts, the driving idea behind GST rates is who is consuming what. That is, since it is a consumption-based tax, the idea is to tax items of mass consumption at lower rates and those consumed by the relatively affluent at higher rates.

This approach to taxation has meant that curd is taxed differently than yoghurt. According to the GST system, unpackaged and unlabeled curd is taxed at zero GST. If it is pre-packaged and labelled, then it attracts 5 percent GST. Yet, if an item is classified as “yoghurt or other fermented or acidified milk and cream,” it will attract a GST rate of 5 percent regardless of whether it is pre-packaged or not.

“Curd is something that is an item of mass consumption, but yoghurt is something that usually only the richer segments eat,” a GST official told ThePrint. Similarly, the official explained that papad was consumed by the general public and so was taxed at zero percent. However, similar items but in packaged form, generally called fryums, were apparently bought by wealthier people and so were taxed at 18 percent.

A lack of clarity on this issue has proven expensive for some restaurants. 

For example, the GST authorities in Rajasthan in 2023 found substantial GST evasion by a restaurant in Sikar, which had apparently classified yoghurt as curd and charged the lower GST rate.

The authority, in its order, went into considerable detail on the difference between curd and yoghurt. All roads led to chemistry, again.

Curd, it said, is made by coagulating milk with edible acids like lemon juice and vinegar in a process known as curdling made by fermenting milk with the help of lactic acid bacteria, which reacts with a protein in milk to produce lactic acid, which then goes on to denature other proteins in milk to form curd. 

Yoghurt, on the other hand, uses live strains of two types of bacteria, the authority said, and is “practically impossible to make at home”. The bacteria react with the sugar present in milk, it further explained, which produces lactic acid, resulting in the formation of yoghurt.

Other differences include nutritional content, the presence or absence of sweeteners or colouring (curd is apparently only unsweetened), who makes it (curd is made at home or by local vendors in lower quantities while yoghurt is more prone to industrial-scale production), and shelf-life.

The restaurant in question allegedly sold yoghurt as curd, resulting in a total GST evasion of Rs 2.82 crore over five years (July 2017 to July 2022).

So you think you’re a restaurant? Think again!

In 2021, the GST Council, following deliberations in its 45th meeting, decided that ice cream parlours were not the same as restaurants. 

Ice cream parlours simply sell “already manufactured” ice cream whereas restaurants cook the food they sell. So the ice cream sold in parlours would attract 18 percent GST while that sold in a restaurant as dessert would be taxed at 5 percent. 

This raised all kinds of still unanswered questions. What happens if an ice cream parlour is located in a food court? What happens if a niche parlour makes its own ice cream and sells it? What happens to a restaurant that has its food cooked by a third party?

This confusion continues today, with newspapers reporting as recently as August this year that several bakeries in Mumbai and Ahmedabad had received notices from the GST authorities because they had been paying GST at 5 percent as if they were restaurants when, in fact, they were not.

They should be paying GST at 18 percent, the Directorate General of Goods and Service Tax Intelligence (DGGI) felt.

(Edited by Amrtansh Arora)