Bombay HC Pauses GST Demand on Mad Over Donuts: Key Takeaways
In a case that could reshape GST classification for bakery and restaurant businesses, the Bombay High Court has temporarily restrained tax authorities from enforcing GST recovery against Mad Over Donuts (Himesh Foods). The dispute revolves around whether the supply of donuts qualifies as restaurant services taxed at 5% GST or as bakery products taxed at 18% GST.
With potential ramifications for food chains across India, the case has sparked industry-wide interest. Here’s a breakdown of the legal arguments, implications, and what businesses should watch for in the upcoming hearings.
Background: Why is GST Classification Critical?
Under the Goods and Services Tax (GST) framework, food supply taxation varies depending on classification:
- Restaurant Services (SAC 9963): Taxed at 5% GST with no input tax credit.
- Bakery Products (under separate HSN codes): Subject to 18% GST.
The dispute arises from tax authorities issuing notices to Himesh Foods and other bakery chains, arguing that donuts and similar products should be taxed as bakery items rather than under restaurant services.
Legal Battle: Arguments in Court
Mad Over Donuts’ Argument:
- Restaurant Services Include Takeaway: The Central GST Act and related notifications define restaurant services to include food supplied at restaurants, eating joints, canteens, and takeaways.
- Official Circular Interpretation: A government circular explicitly clarifies that takeaway services qualify as restaurant services and should be taxed at 5% GST.
- Composite Supply of Services: The petitioner argues that food service is a composite supply, where service dominates over goods.
Tax Authorities’ Argument:
- Bakery Goods Are Different from Restaurant Services: Authorities contend that packaged and pre-prepared bakery items like donuts are distinct from restaurant services and must be taxed at 18% GST.
- Nature of Supply Matters: If an item is sold for consumption outside the premises, it does not qualify as a restaurant service.
Bombay HC’s Interim Relief and Next Steps
- The Bombay HC, led by Justice BP Colabawalla and Justice FP Pooniwalla, has granted Mad Over Donuts protection from coercive recovery actions.
- The GST department has been directed to file its response by March 17, 2025.
- The next hearing is scheduled for March 24, 2025.
- The HC is also examining whether centralized show-cause notices (SCNs) by DGGI suffice, or if separate notices are required for each GST registration.
Why This Case Matters for Businesses
Implications for Food Chains, Bakeries & Restaurants:
- Tax Rate Uncertainty: A ruling in favor of the GST department could mean higher GST rates for bakery chains, leading to increased costs for consumers.
- Takeaway vs. Restaurant Service Distinction: If takeaway is deemed different from dine-in, similar businesses could face reclassification.
- Jurisdictional Challenges: The case also questions whether a single GST investigation across multiple states is valid or if separate proceedings are required.
Key Takeaways for Businesses & Professionals
This case could set a precedent for how food service businesses are taxed, making it essential for industry players to stay informed. As legal battles over GST classifications continue, businesses must adapt their pricing strategies and be prepared for possible changes in tax treatment.