Ice-cream parlours freeze up over new GST circular

GST Council imposes 18% tax on ice-cream manufacturers, but it's being applied to parlours, which don't make it, but sell like restaurants; Lack of clarity over latest decision of GST Council creating confusion among ice-cream parlours, which otherwise have to pay 5% GST

Tax Ambiguity

- 45th meeting of GST Council imposes 18% tax on ice-cream manufacturers

- Same 18% tax is being levied on ice-cream parlours also

- Ice-cream parlour sales considered as supply of goods instead of service

- Ice-cream parlours urge the Centre to consider their sales as service so that it attracts 5% GST

- Ice-cream market in India reached Rs14,100cr in 2020

- Segment expected to grow at CAGR of 17.3%

Mumbai: Recently in the 45th GST Council meeting, it has been recommended that 'Ice-cream parlours, supplying manufactured ice-creams will be taxed @ 18 per cent GST', which has created confusion among the stakeholders.

Further, the Circular issued pursuant to above meeting clarified that where ice-cream parlours sell already manufactured ice- cream and do not cook/prepare ice-cream for consumption like a restaurant, it is supplied ice cream as goods and not as a service, even if the supply has certain ingredients of service. Accordingly, it is clarified that ice cream sold by a parlour or any similar outlet would attract GST at the rate of 18 per cent. Experts believe that the rate should be applied not on one common scale, but on case-to-case basis.

The above Circular has created confusion in the industry and the larger question that needs to be addressed is that whether ice-cream parlours can constitute as a restaurant so as to provide restaurant services chargeable to GST at the rate of 5 per cent or it is merely a sale of goods.

Generally, a restaurant service would warrant services such as arrangements for seating, décor, music and dance, both live and otherwise, hostesses, liveried waiters and the use of fine crockery and cutlery, among others. The question arises if an ice cream parlour has all these facilities, would it still be considered as undertaking supply of goods (i.e. ice cream) taxable at 18 per cent. Talking to Bizz Buzz, CA Tushar Aggarwal, founder partner, Tattvam Advisors, said: "Taxation on food and beverages has been under dispute for more than 50 years now. The controversy emerged from the Northern India Caterers case wherein dine-in restaurant was held to be a service on the ground that the consideration paid was for more than just food. In order to nullify the above judgment, clause 29A(f) was inserted in Article 366 of the Indian Constitution, 1950 by way of The Constitution (46th Amendment) Act, 1982 which created a deeming fiction treating the same as supply of goods as well. The said amendment gave sufficient teeth to the department to tax this as goods as well and consequently there used to be a debate if restaurant

service is a supply of goods, services or both. As taxes on goods and services were levied by different governments, the businesses faced difficulties in applicability issues and to buy peace from the tax authorities, ended up paying both VAT and service tax even when either of them was not payable for the same."

Not to mention that the ice cream market in India reached a value of Rs141.2 billion in 2020. Looking forward, IMARC Group expects the market to grow at a CAGR of 17.3 per cent during 2021-2026. It was expected that the GST regime would resolve this issue and put an end to this controversy. Even though the earlier issues were resolved after the GST regime, a fresh set of problems have arisen, he said.

To analyse and ascertain whether ice cream parlours are rendering a restaurant a service or supply of goods, one needs to analyse following two conditions which include, the ice cream parlour is only providing take away service and other than the sale of ice-creams, the services like seating (exclusive or common seating like in food courts), customized ice cream, shakes etc are provided. In the former condition, the transaction will amount to a mere supply of goods if there is no dine-in facility provided. However, when such facility is provided, the same is a service and not only a sale/supply of goods, he said. According to Aggarwal, "in the present recommendation given in the 45th GST Council meeting, this reasoning is straight away neglected, because there has been no distinction between the ice-cream parlours as in the two cases mentioned above. In that sense the ambiguity arises as the parlour providing restaurant services would be taxed at 5 per cent or 18 per cent.

A similar controversy to the present one arose wherein, Rahul Bose was charged 18 per cent GST on bananas treating the same as supply of services by the hotel. The controversy though started on account of exorbitant charges for two bananas, become a tax controversy. However, in authors view, once an establishment qualifies as a restaurant, it is unfair to view individual supplies as supply of goods. With respect to ice-cream parlours also, same logic applies. Once an ice-cream parlour qualifies as a resultant, sale of ice-cream shall be considered as provision of restaurant services only and not supply of goods.

It is legally inconsistent, he added, to provide a straightjacket taxability for ice-cream parlours wherein transaction at the outset requires ascertainment of the nature of supply as goods or services. The same tests which applies to determine a restaurant service is also applicable to ice-cream parlours and same needs to be considered, while applying the rate of GST. As such, the rate should be applied not on one common scale but on case-to-case basis.