implications of the GST on glaciers; sales simpliciter or catering service?


Food and beverage taxes have been contested for over 50 years now. The controversy arose from the Catering North India case in which the restaurant-restaurant was considered a service on the grounds that the consideration paid was more than just food.

In order to set aside the above judgment, clause 29A (f) was inserted into section 366 of the Indian Constitution of 1950 through the Constitution Act (46th Amendment) of 1982, which created a presumed fiction dealing the same as the supply of goods. . This amendment gave enough leverage to the department to tax this as goods, and as a result, there was debate as to whether food service was a supply of goods, services, or both. As taxes on goods and services were collected by different governments, companies encountered difficulties in enforceability and to buy peace from tax authorities, ended up paying both VAT and tax on services even when either was not payable for the same.

The GST system was expected to solve this problem and end this controversy. Even though the earlier problems were resolved after the GST regime, a new set of problems arose.

Takeaway from 45e GST Council Meeting

Recently in the 45e GST Council meeting, it was recommended that “Ice cream parlors that supply manufactured ice cream will be taxed at 18% GST.” Further, the circular issued as a result of the above meeting clarified that when ice cream parlors sell pre-made ice cream and do not cook / prepare ice cream for consumption like a restaurant, it is supplied as a product and not as a service, even if the supply includes certain service ingredients. Therefore, it is clarified that ice cream sold by a salon or other similar outlet would attract GST at the rate of 18 percent.

The above circular has created confusion in the industry and the larger question that needs to be addressed is whether ice cream parlors can constitute a restaurant in order to provide catering services subject to GST at the rate of 5 percent or if it is simply a sale of the goods. Generally, a catering service would justify such services as arrangements for seating, decor, music and dancing, both live and otherwise, hostesses, waiters in livery and the use of tableware and fine cutlery, among others. The question arises if an ice cream parlor has all of these facilities, would it still be considered a business supplying products (ie ice cream) taxed at 18 percent.

Ice cream parlors – Sale of rendering products or services

To analyze and determine whether ice cream parlors render a service or a supply of goods to a restaurant, the following two conditions must be analyzed;

(1) The glacier only offers take-away meals

(2) In addition to the sale of ice cream, services such as seats (exclusive or common seats such as in food courts), personalized ice creams, shakes, etc. are provided

In the first condition, the transaction will be equivalent to a simple supply of goods if no catering service is provided. However, when such a facility is provided it is a service and not just a sale / supply of goods.

In this recommendation given in the 45e Advice from the GST, this reasoning is immediately overlooked, because there was no distinction between glaciers as in the two cases mentioned above. In this sense, ambiguity arises since the salon providing catering services would be taxed at 5% or 18%.

Lessons from the Rahul Bose controversy

A controversy similar to the present one arose in which, Rahul Bose was charged 18 percent GST on bananas on the same basis as the provision of services by the hotel. The controversy although started because of the exorbitant fees for two bananas, has turned into a tax controversy. However, in the authors’ view, once an establishment is qualified as a restaurant, it is unfair to view individual supplies as supplies of goods. The same logic applies to glaciers as well. Once an ice cream parlor qualifies as an outcome, the sale of ice cream is considered a provision of catering services only and not a provision of goods.

Responding to the rate controversy

It is legally inconsistent to impose a straitjacket on ice cream vendors in which the transaction initially requires determining the nature of the supply as goods or services. The same tests that apply in determining a restaurant service also apply to ice cream parlors and should be taken into account when applying the GST rate. As such, the rate should be applied not on a common scale but on a case-by-case basis.

(Tushar Aggarwal is a founding partner, Tattvam Advisors)

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Posted on: Tuesday November 09, 2021 15:24 IST


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