Cloud Kitchens & Takeaways: GST Composition Scheme Eligibility & Compliance

Cloud kitchens and takeaway businesses can opt for GST Composition Scheme at 5% rate if turnover and other conditions are met, as per GST law & clarifications; Cloud Kitchens, Takeaways Eligible for GST Composition Scheme; Cloud Kitchens & Takeaway – Composition Scheme Eligibility and Practical Compliance under GST

I. Background

With the rapid evolution of the food service industry, particularly the rise of cloud kitchens and delivery-based operations, the question of eligibility under the Composition Scheme prescribed under the Central Goods and Services Tax Act, 2017 (hereinafter referred to as “the CGST Act”) has gained significant practical relevance. A number of registered persons engaged in supplying food through cloud kitchens or takeaway counters often seek to opt into the Composition Scheme to avail the benefit of lower tax rates and simplified compliance. However, ambiguity regarding the classification of such services under the GST framework necessitates a detailed legal analysis.

II. Statutory Framework – Composition Scheme under Section 10 of the CGST Act, 2017

The Composition Scheme is governed by the provisions of Section 10 of the CGST Act, 2017. As per Section 10(1), notwithstanding anything to the contrary contained in the Act, a registered person whose aggregate turnover in the preceding financial year does not exceed ₹1.5 crore (or ₹75 lakh in special category states) may opt to pay tax in lieu of the normal tax payable under Section 9(1), subject to conditions and restrictions prescribed.

Specifically, clause (b) of sub-section (1) of Section 10 enables a registered person who is engaged in the supply of food or any other article for human consumption or drink (other than alcoholic liquor for human consumption) as part of any service to opt for the composition scheme and pay tax at a rate of 5% (2.5% CGST + 2.5% SGST), as prescribed under Rule 7 of the Central Goods and Services Tax Rules, 2017.

III. Nature of Supply – Whether Cloud Kitchens Qualify as “Restaurant Services”

The eligibility of a cloud kitchen to opt for composition primarily hinges on the classification of the services it provides. In this regard, Notification No. 11/2017–Central Tax (Rate) dated 28th June 2017, as amended from time to time, plays a crucial role. Entry 7(i) of the said Notification classifies restaurant services under the 5% rate category, which includes the supply of food or beverages for human consumption provided by a restaurant, eating joint including mess, canteen, etc., with the condition that input tax credit shall not be available.

The Central Board of Indirect Taxes and Customs (CBIC) provided a significant clarification in this regard through Circular No. 164/20/2021-GST dated 6th October 2021. It was clarified therein that “restaurant service” includes takeaway services or door delivery of food, and is not restricted only to dine-in facilities.

Importantly, the Circular further clarified that services provided by cloud kitchens or central kitchens shall be covered under the scope of ‘restaurant services’, provided that they involve the supply of cooked food for human consumption, whether consumed on the premises or not. This clarification effectively removed ambiguity concerning the status of cloud kitchens under the GST rate notification.

IV. Eligibility Conditions for Composition Levy – Applicability to Cloud Kitchens

In order to validly opt for the Composition Scheme under Section 10(1)(b), a cloud kitchen operator must satisfy the following statutory conditions:

1. The aggregate turnover in the preceding financial year must not exceed the threshold limit of ₹1.5 crore (or ₹75 lakh, where applicable).

2. The person must be engaged exclusively in the supply of goods or services, or both, which are not exempt under the GST law, and must not be supplying non-GST goods such as alcoholic liquor for human consumption.

3. The person must not engage in inter-State outward supplies of goods or services (Section 10(2)(a)).

4. The person must not supply goods through an e-commerce operator required to collect tax under Section 52, unless properly compliant.

5. The person must not be a manufacturer of such goods as may be notified by the Government under Section 10(2)(e).

6. The person must file intimation in Form GST CMP-02 prior to the commencement of the financial year or from the date of registration.

Given the above framework, a cloud kitchen that supplies cooked food to customers for consumption (either directly or through delivery aggregators, while remaining compliant with TCS provisions) and satisfies the turnover and other eligibility criteria, would qualify to opt for the Composition Scheme.

V. Tax Rate and Compliance Requirements under Composition Scheme

As per Rule 7 of the CGST Rules, 2017, the applicable rate for a registered person supplying restaurant services (which now includes cloud kitchens and takeaway-only counters) is 5% of the turnover in the State or Union territory (2.5% CGST + 2.5% SGST).

The compliance requirements under the Composition Scheme include:

• Filing of quarterly returns in Form CMP-08 by the 18th of the month following the end of the quarter.
• Filing of annual return in Form GSTR-4 by 30th April of the following financial year.
• Display of “Composition Taxable Person” on every notice or signboard at the principal and additional place of business.
• No collection of tax from customers (as per Section 10(4)).
• No entitlement to Input Tax Credit (as per Section 10(4)).

VI. Circumstances Disqualifying a Cloud Kitchen from Composition Scheme

A cloud kitchen shall be rendered ineligible to opt for the Composition Scheme under the following circumstances:

• If it engages in inter-State outward supplies, in contravention of Section 10(2)(a).
• If it supplies goods or services through an e-commerce operator liable to collect TCS under Section 52, without appropriate registration and compliance.
• If it manufactures or trades in notified goods, such as pan masala, ice cream, or tobacco products, which are notified under Notification No. 15/2019-Central Tax dated 7th March 2019, read with Section 10(2)(e).
• If the aggregate turnover exceeds the prescribed limit during the financial year.

In such scenarios, the taxpayer must switch to the regular scheme and issue tax invoices accordingly.

VII. Judicial and Advance Ruling Positions

The Authority for Advance Ruling (AAR), Karnataka in the matter of a cloud kitchen operator (Order No. KAR ADRG 35/2020) held that a cloud kitchen involved in preparing and supplying food items to customers qualifies as providing restaurant services and is therefore eligible for the composition levy, subject to other conditions being fulfilled.

VIII. Conclusion

In light of the legislative provisions, notifications, and official clarifications, it is evident that cloud kitchens and takeaway outlets providing cooked food to customers for human consumption qualify as providers of “restaurant services” for the purposes of GST. Accordingly, such entities are eligible to opt for the Composition Scheme under Section 10(1)(b) of the CGST Act, 2017, subject to compliance with all statutory conditions and restrictions.

It is imperative for such businesses to ensure strict adherence to compliance requirements and remain updated with relevant notifications and circulars to avoid disqualification and penal consequences under the law.

Important Practical Q&A

Q1. Can a cloud kitchen supplying food only through Swiggy/Zomato opt for the Composition Scheme?

Ans: Yes, provided the cloud kitchen complies with Section 52 and ensures the e-commerce operator is collecting and depositing TCS. However, practical complexities around e-commerce integration and state-wise conditions must be considered.

Q2. What happens if the turnover exceeds ₹1.5 crore during the year?

Ans: The entity becomes ineligible from the date turnover exceeds the threshold. It must migrate to the regular scheme, issue tax invoices, and start collecting and paying tax at the applicable rate.

Q3. Can cloud kitchens claim input tax credit under the Composition Scheme?

Ans: No. Under Section 10(4), a composition dealer is not entitled to input tax credit.

Q4. Can cloud kitchens operate in multiple states and still opt for composition?

Ans: No. Inter-State outward supply disqualifies a person from opting into the Composition Scheme.

Q5. What if the cloud kitchen also trades in soft drinks or ice cream along with food?

Ans: If the kitchen trades in notified goods (e.g., ice cream), it will be ineligible for composition under Section 10(2)(e) read with Notification No. 15/2019-Central Tax.

Q6. What are the key risks for cloud kitchens opting into the Composition Scheme?

Ans: Primary risks include:

• Unintentional inter-State supply (e.g., delivery to nearby cities).
• Use of e-commerce platforms without TCS compliance.
• Misclassification of taxable turnover.
• Exceeding turnover threshold without prompt migration.

Q7. Can a takeaway counter inside a mall opt for the Composition Scheme?

Answer: Yes, provided the takeaway counter does not provide alcoholic beverages, operates within the same state, and satisfies other eligibility conditions, it can opt for the Composition Scheme. It is considered as providing restaurant services as clarified by CBIC Circular No. 164/20/2021-GST.

Q8. What happens if a cloud kitchen inadvertently collects GST from customers under the Composition Scheme?

Answer: A composition dealer is not allowed to collect tax from customers (Section 10(4)). If GST is collected inadvertently, it may be treated as an offence, and the dealer may be liable to pay tax under the regular scheme, with possible penalties under Section 73 or 74 of the CGST Act.

Q9. Can a cloud kitchen having multiple outlets in different states opt for the Composition Scheme in all states?

Answer: No. The cloud kitchen must take separate registration in each state. It can opt for the Composition Scheme only in the states where the aggregate turnover for that state is within the threshold and no inter-state outward supply is made. If inter-state supply occurs from any branch, the Composition Scheme is not available in any state.

Q10. What records and invoices must be maintained under the Composition Scheme?

Answer: Under the Composition Scheme, compliance is simplified:

• No detailed invoices are required—only Bill of Supply must be issued.
• Maintain summary records of inward/outward supplies, stock records, and tax paid via CMP-08.
• File CMP-08 quarterly and GSTR-4 annually.

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Disclaimer: The information provided in this article is intended for general understanding and educational purposes only. It reflects the provisions of the Goods and Services Tax (GST) law as interpreted by the author based on notifications, circulars, and judicial pronouncements available as on the date of writing.

Readers are advised to consult a qualified tax professional or refer to the official GST law for specific guidance before making any business decisions. The author and publisher disclaim any liability for actions taken based on the contents of this article.