[Opinion] Differential GST Treatment for Restaurants – A Continuing Controversy

Hardik Shah & Kumar Parekh – [2023] 148 taxmann.com 235 (Article)

There has been a widespread change in the eating experience offered by restaurants, cafes and eating joints recently. The new age restaurants and cafes now have extensive offerings of cooked food, as well as ready-to-eat options, desserts and over-the-counter saleable food, along with ready-to-drink beverages. Also, the concept of cloud kitchen is in vogue due to benefits from structure optimization and cost-effectiveness. The food would be cooked at one place, i.e., in the cloud kitchen and the same would be offered/sold through restaurants or eating joints who would ultimately serve the same to consumers. This paradigm shift in business is to vow maximum consumers amid changing preferences and requirements.

However, when the above business modus-operandi is seen in the light of GST provisions, tax implications do not appear to be simple. The trade has unresolved doubts on the taxability of cooked food vis-à-vis ready-to-eat food and over-the-counter sale of food, desserts and beverages. Therefore, applications were filed before the Advance Ruling authorities seeking ruling on taxability and the applicable rates thereon on different food items, in view of multiple permutations and combination of transactions adopted by the restaurant and food industry.

One such recent advance ruling was issued by the Gujarat Advance Ruling Authority (Authority) wherein the Authority ruled as under:

1. The supply of ice cream from the outlets of the applicant cannot be considered as supply of ‘restaurant services’. The readily available ice creams [not prepared in their outlets] sold over the counter is supply of goods. However, an ice cream when ordered and supplied along with cooked or prepared food, through their outlets would assume the character of composite supply, wherein the prepared food being the principal supply and hence qualifies as ‘restaurant services’.

2. The supply of ice cream from the outlets of the applicant is not classified as ‘restaurant services’. However, the composite supply, supra, classifiable under ‘restaurant service’ would be leviable to GST @ 5% with no input tax credit as per Sr. No. 7(ii) of notification No. 11/2017-CT (Rate) dtd 28.6.2017 as amended vide notification No. 20/2019-CT (Rate) dated 30.9.2019.

3. The supply of only ice cream [not prepared in their outlets and which is readily available] from any of the outlets of applicants is held to be akin to supply of ice cream from ice cream parlour, leviable to GST @ 18%.

The above ruling makes an artificial distinction in tax treatment based on sale/service of the underlying product, i.e., readily available or cooked. It rules that readily available ice creams not prepared in their outlets, would not form part of restaurant services and would be considered as supply of goods, subject to 18% GST. However, when the same ice-cream is sold/served along with cooked or prepared food, then the same would form part of composite supply of restaurant services.

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