Introduction
This article analyses the applicability of Goods and Services Tax including the classification of nature of supply, the rate of GST and availment of Input Tax Credit on Restaurant-cum- Retail Outlet.
Now a days Sweet Shops are no more a Mithai Wali Dukaan, rather, a well organized retail outlet with inbuilt restaurant. Businesses originally started as sweet shops or confectionaries have diversified into chain of restaurant-cum-retail outlet selling various branded packed food items, drinks and other articles of human consumption. In case of sale of goods being articles of human consumption, GST may vary from 5% to 28%, plus a levy of surcharge on few items. However, GST on services classified as “restaurant service” is levied at the rate of 5% provided that credit of input tax charged on goods and services used in supplying the service has not been taken.
Identifying the Nature of Supply
First of all, we have to go through the relevant provisions of GST law which are covered under section 2 of the Central Goods and Services Act ibid. The relevant portion of the same extracted and read as under:
(30). “composite supply” means a supply made by a taxable person to a recipient consisting of two or more taxable supplies of goods or services or both, or any combination thereof, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply; (52). “goods” means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply; (74). “mixed supply” means two or more individual supplies of goods or services, or any combination thereof, made in conjunction with each other by a taxable person for a single price where such supply does not constitute a composite supply. (90). “principal supply” means the supply of goods or services which constitutes the predominant element of a composite supply and to which any other supply forming part of that composite supply is ancillary;
(102). “services” means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged; If we look at the present market scenario, we will notice that very often, combination of two or more goods or a combination of goods and services, are supplied together. This marketing strategy is not only followed by local businesses but also well-known Multi- National Brands. This could be due to either of the following reasons: (i) A sales strategy – to attract more customers
(ii) The nature or type of goods or services, which requires them to be bundled or supplied together Under the Service Tax Regime, the mechanism to supply two or more services together was known as “Bundled Service” – which is the rendering of a service or services with another element of service or services. The service tax law was dealing with pure services and not with goods per se. Now the concept introduced is for goods also and is linked with the concept of Principal Supply. Under the present Goods and Services Tax law, supplies,
which are bundled with two or more supplies of goods or services or combination of goods and services are classified, with distinct characteristics, as:
(i) Composite Supply
(ii) Mixed Supply
If we look at the definitions (supra), Composite supply is one where two or more goods or services or both are supplied together, in a natural bundle and in a normal course of business, provided one of which is a principal supply. However, principal supply will be that supply which is predominant over other supplies. This means that the goods and services are bundled owing to natural necessities. The Composite supply is taxed at the rate applicable to the principal supply whereas a Mixed supply means two or more individual supplies of goods or services, or any combination thereof, made in conjunction with each other by a taxable person for a single price where such supply does not constitute a composite supply. It means each of these items can be supplied separately and is not dependent on any other. In Mixed Supply, the combination of goods and/or services is not bundled due to natural necessities, and they can be supplied individually in the ordinary course of business.
In order to identify if the particular supply is a Mixed Supply, the first requisite is to rule out that the supply is a composite supply. A supply can be a mixed supply only if it is not a composite supply. As a corollary it can be said that if the transaction consists of supplies not naturally bundled in the ordinary course of business then it would be a Mixed Supply. Once the amenability of the transaction as a composite supply is ruled out, it would be a mixed supply, classified in terms of a supply of goods or services attracting highest rate of tax. In the case of restaurant-cum-retail outlets, the services from the restaurant is a principle supply which provides a bundled supply of preparation & sale of food, and serving the same and therefore it constitutes a composite supply. It further satisfied the following conditions of a composite supply: (i) Supply of two or more goods or services or both together (ii) Goods or services or both are usually provided together in the normal course of business. The nature of restaurant services is such that it may be treated as the main supply and the other supplies combined with such main supply are in the nature of incidental or ancillary services. Thus restaurant services get the character of predominant supply over other supplies. The sale of retail items shall be treated as extension of the restaurant in as much as the said activity covered under Schedule II of the Act ibid and the relevant portion of the same read as under: Schedule II of Central Goods and Services Act (See Section 7) : Activities to be treated as supply of goods or supply of services
6. Composite Supply
The following composite supplies shall be treated as a supply of services, namely:-
(a) ———— (b) supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (other than alcoholic liquor for human consumption), where such supply or service is for cash, deferred payment or other valuable consideration.
Applicability of GST rate
Since we have already classified the supply as activity of “restaurant services”, the same falls under Heading 9963 of (GST rates on services under Notification No. 11/2017- Central Rate (Tax) dated 28.06.2017 (as amended time to time) and the relevant portion of the same is reproduce as under:
Thus, the rate of GST on restaurant services shall be 5% (as on date) without availing the input tax credit on the GST paid on the goods and services used in supplying the service in terms of the aforesaid notification.
Recent Judicial Pronouncements
The matter was dealt with by Authority of Advance Ruling (GST AAR Uttarakhand) in case of M/s Kundan Misthan Bhandar. Following were the issues dealt with in the appeal:
1. Whether supply of pure food items such as sweetmeats, namkeens, cold drink and other edible items from a sweetshop which also runs a restaurant is a transaction of supply of goods or a supply of service; 2. What is the nature and rate of tax applicable to the following items supplied from ground floor of a sweetshop in which restaurant is also located on the first floor and whether the applicant is entitled to claim benefit of input tax credit with respect to the same: i. Sweetmeats, namkeens, Dhokla etc. commonly known as snacks, cold drinks, ice creams and other edible items; ii. Ready to eat (partially or fully pre-cooked/ packed) items supplied from live counters such as jalebi, chola bhatura and other edible items; iii. Takeaway order of sweetmeats or namkeens by a person sitting in the restaurant of a sweetshop when such products are not consumed within the premises of the applicant but are takeaway. Authority of Advance Ruling, Uttarakhand held that 1. The supply shall be treated as supply of service and sweet shop shall be treated as extension of restaurant; 2. The rate of GST on aforesaid activity will be 5% as on date, on the condition that credit of input tax charged on goods and services used in supplying the said service has not been taken;
3. All the items including takeaway items from the said premises shall attract GST of 5% as on date subject to the condition of non availment of credit of input tax charged on goods and services used in supplying the said service.
The above judgement clearly states that all the supplies from a premises wherein both the restaurant and retail outlet are operating must be classified under heading 9963 and consequently chargeable at the rate 5% without availing Input Tax Credit.
Conclusion
Although the above judgement applies only to the jurisdiction exercised by the AAR Uttarakhand and is not legally binding to others, one can reasonable argue the applicability of GST provisions as it can impact large number of small, medium and large enterprises and also the Multi-National Companies operating in India in the said business. Apart from the GST rate, non-availability of Input Tax Credit plays an important role. If the above judgement is to be followed, there can be financial implication on the restaurant availing Input Tax Credit on the items sold through the retail outlets.
In view of the author, in case the business of restaurant and retail outlet are carried out from same premises, all the supplies must be classified under heading 9963 and consequently GST at the rate 5% must be charged without availing Input Tax Credit on the goods and services used in supplying the service.
However, if an organisation choses to set-up separate divisions for restaurant and retail outlet, it must clearly identify the supplies made from the restaurant division (whether dine-in or takeaway) and the retail outlet division (applying GST rate as per the nature of item sold) and both the businesses must be clearly demarcated.
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