A Ta­ble and 2 Chairs can Save Tax for Cake Shops

As per a rul­ing, prod­ucts at­tract 5% tax in­side eater­ies and 12% and 18% in other shops

The Economic Times - - Companies: Pursuit Of Profit - Sachin.Dave @times­group.com

Mum­bai: What could pos­si­bly be the dif­fer­ence be­tween a cake shop with two ta­bles and four chairs and an­other without the fur­ni­ture?

Well, ac­cord­ing to the rev­enue de­part­ment the an­swer would be tax ar­bi­trage of up to 13%. So, don't be sur­prised to see your cor­ner mithai­wala, hal­wai or cake out­let owner sud­denly re­brand­ing his shop to add ‘restau­rant’ and put a cou­ple of ta­bles and chairs in the premises.

A re­cent tax rul­ing prac­ti­cally means that Goods and Ser­vices Tax (GST) rate for any food item sold by a shop­keeper would be 5% if there is also a restau­rant run in the same premises. Cur­rently, branded snacks are taxed at 12% and pas­tries/ cakes are taxed at 18%. On the other hand, GST rate in­side restau­rants is 5%. An Au­thor­ity of Ad­vance Rul­ing (AAR) said in a re­cent case that if a restau­rant is run in the same premises as a sweet shop, GST should be levied at 5%.

GST rate on sweet shops that have a restau­rant in their premises would dif­fer. For ex­am­ple, if one was to sell pas­try in a pas­try shop, it would at­tract 18% GST. But if there is a restau­rant in the premises, the shop owner could claim that all the pas­tries are con­sumed by cus­tomers who come to the restau­rant. And hence GST will be at 5%.

Tax ex­perts point out that this rul­ing is set to cre­ate a lot of con­fu­sion but could be a bo­nanza for many ma­jor play­ers like Sar­vana Bha­van or Haldiram’s that work on a sim­i­lar model.

“This de­ci­sion could re­quire re­con­sid­er­a­tion as the rates un­der GST are prod­uct­spe­cific and are not gen­er­ally de­pen­dent on the man­ner of sup­ply. While it is un­der­stand­able that sup­plies of sweet­meats by a restau­rant could be treated as a restau­rant ser­vice, the same by a sweet­shop on a take­away ba­sis would nor­mally at­tract the ap­pli­ca­ble rate of GST on the prod­ucts be­ing sold,” said MS Mani, part­ner, Deloitte In­dia. The owner of a sweet shop owner — Kun­dan Misthan Bhan­dar— had ap­proached AAR to find out whether sup­ply of food items like sweet­meats, nam­keen and cold drinks from a sweet shop which runs a restau­rant is a trans­ac­tion of sup­ply of goods or ser­vices. The AAR in the rul­ing spoke of two con­cepts in GST frame­work — mixed sup­ply or com­pos­ite sup­ply.

Mixed sup­ply is when two prod­ucts with dif­fer­ent tax rates are bun­dled to­gether. Say, hair oil and comb — where tax rate for oil is 18% while for comb is12%. If a man­u­fac­turer were to com­bine both and sell it as a combo then tax rate of 18%, or the high­est of the two shall ap­ply.

How­ever, com­pos­ite sup­ply un­der GST talks about cer­tain ser­vices that are in­ci­den­tal. Like if one were to take a flight and meals are pro­vided on the flight, the food would be cat­e­gorised as in­ci­den­tal sup­ply as the main sup­ply for the air­line is op­er­at­ing flights. Hence, in this case, GST rate of the prin­ci­pal sup­ply— that is tax on air­line ser­vices — will ap­ply even on the food pro­vided on the plane.

The AAR rul­ing said in the Kun­dan Mish­tan Bhan­dar’s case that it is a com­pos­ite sup­ply and hence the tax rate of the restau­rant should ap­ply.

The rul­ing may have cre­ated com­pli­ca­tions not just for the tax de­part­ment but also for fu­ture dis­putes, say tax ex­perts.

“The de­ci­sion also brings out the in­her­ent dif­fi­cul­ties in de­ter­min­ing the prin­ci­pal sup­ply and in­ci­den­tal sup­plies in case of com­pos­ite sup­plies made by two dis­tinct es­tab­lish­ments housed in the same premises and hav­ing the same GST reg­is­tra­tion num­ber,” said Mani.

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