Indian spices and delicacies such a Curry, Biryani, Chaat, Chole Bhature, etc. are loved around the world. And these delicacies are served in the most exquisite restaurants to the roadside dhabas. So how will GST impact them?
Sale of food by a restaurant is a supply of goods or a supply of service?
The taxability of sale of food by a restaurant has been an area of litigation for long. Service tax was imposed on sale of food in an AC restaurant few years back and the question of constitutional validity of such levy is currently pending in various High Courts. GST seems to have probably soughted out this issue by subsuming service tax and VAT.
But it is important to differentiate between goods and services under Indian GST. Well a classic GST does not differentiate between goods and services. But because Indian GST has different slab rates, it becomes imperative to determine whether the supplies made by a restaurant will be treated as a supply of goods or supply of services.
In this regard, Schedule 2 to the CGST Act provides that a composite supply by way of or part of any service or in any other manner, of food, drinks or any other article for human consumption shall be deemed to be supply of service. It is herein important to note that composite supply means a supply of two or more taxable goods or services which are naturally bundled.
Now let’s take three scenarios:
- Serving of food in a restaurant: This involved two activities, sale of cooked food and serving in a restaurant with a good ambience. Since it involves a natural bundle of two supplies, it will be considered a composite supply and will be deemed to be a supply service.
- Home delivery of food: This also involved two activities, sale of food and service of home delivery. Since this is also a natural bundle of two supplies, it will be considered a composite supply and will be deemed to be a supply service.
- Counter sale from restaurant: Counter sale or sale of parcels involves only one element of sale of food. Sale of a cake is one such example. There is no element of service involved in this case. Therefore, it would be classified as a supply of goods and GST rules and rates relating of taxability of goods would apply on such transactions.
No input tax credit reversal and availability of credit on capital purchases
With sale of cooked food attracting VAT and Service tax, there has always been a contention that there should be credit reversal on input services. Restaurants generally incur significant amount of service tax on various input services including renting and are unable to take full credit of the same. Come GST, they will be entitled to get full credit on all input services.
Additionally, VAT paid on such capital purchases such as furniture, AC etc. is currently a cost. With GST subsuming multiplicity of taxes, the credit will become eligible on such capital purchases as well.
Credit reversal on sale of alcohol for human consumption
Alcohol for human consumption has been kept outside GST and is considered a non-taxable supply. Thus any restaurant selling alcohol will have to undertake reversal of input tax credit to extent it pertains to sale of alcohol. The computation will have to make on the basis of Input tax credit rules.