New Delhi: It’s a question that’s got the food industry in a jam: Should donuts be taxed as bakery products or restaurant services?
The Bombay High Court is preparing to dig into this sticky issue on 24 March when a two-judge bench of Justices B.P. Colabawalla and Firdosh P. Pooniwalla will decide whether donuts should be treated as bakery products subject to 18 percent Goods and Services Tax (GST) or classified as restaurant services and pay a lower 5 percent tax.
Abhishek A. Rastogi, who is representing Singapore-based chain Mad Over Donuts (MOD), called this case the first of its kind that could have far-reaching implications, not just for restaurant chains and bakery businesses but also other industries relying on the classification of food services under GST.
According to Rastogi, donuts should be taxed at 5 percent as the supply of food or other edible products qualifies as a “composite supply” of services under the Central Goods and Services Tax (CGST) Act, which attracts a 5 percent tax.
He also cited a GST notification from the Ministry of Finance that states restaurant services include food supplied at restaurants, eating places, messes and canteens, regardless of whether it’s for consumption on the premises or as takeaway.
The government circular confirms that takeaway services should be classified as services and taxed at 5 percent, according to him.
“We are saying that the supply of donuts is a service since it falls under the composite supply of goods and services, which is squarely covered in Schedule II to the Central Goods and Services Tax (CGST) Act, Entry 6,” Rastogi told ThePrint.
According to Entry 6 of Schedule II of the 2017 Act, when goods and services are bundled and sold together as a “composite supply”, they should be treated as services.
This provision covers work contracts and the supply of edible goods like food, non-alcoholic drinks or any other article for human consumption provided as part of any service or in “any other manner”. Such supplies or services can be paid for through cash, deferred payment, or other valuable considerations.
Rastogi compared it with buying a house where the combination of materials and services makes it a composite service.
“Suppose you want to buy a house in GK-1. The combination of the service of constructing the house along with the goods like construction materials, including bricks, tiles, etc., makes this a composite service,” Rastogi, founder of Rastogi Chambers, told ThePrint.
“The law is very clear on this, and there is no confusion that the supply of donuts is a service.”
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What is a composite supply?
The CGST Act sets different tax rates for goods and services, making it necessary to classify them correctly to determine the applicable rates of GST.
However, this categorisation is not always simple because sometimes goods or services may appear in combinations. Determining the right tax rates in such cases can be tricky.
To solve this problem, the GST law has introduced the idea of “composite supplies” and mixed supplies to make it clear how taxes should be applied.
What is the case?
The origins of this case lie in a 3 August show-cause notice sent by the Directorate General of Goods and Service Tax Intelligence (DGGI) to Mad Over Donuts which entered India in 2008 with its first store in Noida, Uttar Pradesh.
The notice directed the multinational donut chain to pay Rs 100 crore in taxes and fines for incorrectly classifying their business as a restaurant service rather than a bakery product.
Similar notices were also issued to other donut chains like Dunkin’ Donuts and Krispy Kreme.
Subsequently, donut chain MOD owned by Himesh Foods approached the Bombay High Court seeking clarification on whether the supply of donuts qualified as restaurant services under the Service Accounting Code (SAC) 9963 or should be treated as a bakery product subject to different tax treatment under the GST framework.
Service Accounting Codes (SAC) are used in India to identify, classify, measure and determine the GST rate for services.
Although based on the internationally agreed United Nations Central Product Classification, these codes have been modified to suit the Indian context.
This system has five GST slabs for different services: zero percent, 5 percent, 12 percent, 18 percent and 28 percent. Services without an SAC code are automatically taxed at the default rate of 18 percent.
Another key issue before the court stemmed from the multiplicity of proceedings across different territorial jurisdictions. The bench examined whether a single show-cause notice from the DGGI was enough or if separate notices were needed for each GST registration across different states.
The respondents have been asked to submit their response by 17 March, with the next hearing set for 24 March.
Is this the first time courts have dealt with such questions?
This will be the very first time an Indian court decides whether to tax donuts as bakery products or as restaurant services, but similar tax cases have arisen in the past few years.
In one notable case, the Kerala High Court on 2 April, 2024, halted the enforcement of a ruling by the Kerala Authority for Advance Ruling (AAR), which held that Modern Food’s Classic Malabar Parota and Whole Wheat Malabar Parota were eligible for 18 percent GST under the CGST Act, 2017. Simply put, this meant that parathas were eligible to be taxed as bread and not as “food preparations”.
Advance rulings are an inexpensive and simple way of dealing with potential tax classification disputes without long-drawn and expensive litigation. An order passed by the Authority for Advance Ruling (AAR) is binding on an applicant and the government.
Under Section 97 of the 2017 Act, anyone seeking clarification on the classification of goods or services, including applicable tax rates, can apply for an advance ruling.
Kochi-based Modern Foods had applied for such a ruling in 2018 to determine the rate for its products.
However, on 12 October 2018, the AAR categorised Modern Foods’ parottas under “food preparations not elsewhere specified or included”, which is taxed at 18 percent GST under Schedule III of the Rate Notification.
Modern Foods challenged the AAR’s decision in the Kerala High Court and the court ruled its products should be taxed at 5 percent, not 18 percent.
Another example is the differential tax treatment for various types of popcorn—ready-to-eat, normal, prepackaged popcorn and caramel—which are taxed at varying rates of 5 percent, 12 percent, and 18 percent, respectively.
(Edited by Sugita Katyal)
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