A Stormy GST Circular for the Kitchen’s cloud

Restaurant service is taxed under GST vide Sl. No.7 of Notification No. 11/2017-Central Tax (Rate), wherein the existing rate chargeable is specified @ 2.5%, with the condition that “credit of input tax charged on goods and services used in supplying the service has not been taken”.

Further an explanation is also applicable on the above entry which reads as:

Wherever a rate has been prescribed in this notification subject to the condition that credit of input tax charged on goods or services used in supplying the service has not been taken, it shall mean that,-

(a) credit of input tax charged on goods or services used exclusively in supplying such service has not been taken; and

(b) credit of input tax charged on goods or services used partly for supplying such service and partly for effecting other supplies eligible for input tax credits, is reversed as if supply of such service is an exempt supply and attracts provisions of sub-section (2) of section 17 of the Central Goods and Services Tax Act, 2017 and the rules made thereunder.

Now restaurant service has been defined as “supply, by way of or as part of any service, of goods, being food or any other article for human consumption or any drink, provided by a restaurant, eating joint including mess, canteen, whether for consumption on or away from the premises where such food or any other article for human consumption or drink is supplied.”

The applicable HSN for this service is reproduced below:

The point of dispute is in the rate of taxability in case of central kitchens, which do not provide any service except preparation of food and delivering the same to partner restaurants.

To add to this uncertainty, the lockdowns imposed brought into fore ‘cloud kitchens’, which otherwise on the similar model as central kitchens albeit the preparation is done usually on order basis and not on bulk basis.

For the sake of simple clarity, central kitchens usually mean a place where in cooked food is prepared for partner restaurants based on their daily requirements and are then supplied to the said outlets for further sale to final consumers, whereas in case of a cloud kitchen, such establishment does not offer any seating or dine in facility but offers only takeaway service of cooked food for consumption elsewhere.

The point of dispute is the rate of taxability in case of the above.

The rate notification has defined the term ‘restaurant service’ as supply, by way of or as a part of any service of goods, being food or any other article for human consumption or any drink, provided by a restaurant, eating joint including mess, canteen, whether for consumption on or away from the premises where such food or any other article for human consumption or drink is supplied but the meaning of the terms ‘restaurant’, ‘eating joint’ and like have not been defined anywhere in the act resulting in a muddle.

The pertinent question is whether seating and serving facility mandatory or only take away of the food without such facilities are enough to classify a premise as a restaurant? In the absence of an absolute definition, the matter has become a contentious issue. As the term is not defined in the law, reference of the definition provided in the Cambridge dictionary can be taken where it is provided that a Restaurant is a place where meals are prepared and served to the customer. On the basis of the above definition, we can conclude that mere preparation of food at a premise where only take away is available cannot be classified as a restaurant service and therefore, shall not be covered under the tax entry of restaurant service provided in the notification.

The government however, in order to increase its coffers has come up with a unique clarification vide Circular 164/ 20/2021-GST, dated the 6^th October, 2021, wherein they vide paragraph 3, they have clarified regarding applicable GST rate on Services by cloud kitchens/central kitchens.

3. Services by cloud kitchens/central kitchens:

3.1 Representations have been received requesting for clarification regarding the classification and rate of GST on services rendered by Cloud kitchen or Central Kitchen.

3.2 The word “restaurant service” is defined in Notification No. 11/2017 – CTR as below: –

“Restaurant service” means supply, by way of or as part of any service, of goods, being food or any other article for human consumption or any drink, provided by a restaurant, eating joint including mess, canteen, whether for consumption on or away from the premises where such food or any other article for human consumption or drink is supplied.”

3.3 The explanatory notes to the classification of service state that “restaurant service” includes services provided by Restaurants, Cafes and similar eating facilities including takeaway services, room services and door delivery of food. Therefore, it is clear that takeaway services and door delivery services for consumption of food are also considered as restaurant service and, accordingly, service by an entity, by way of cooking and supply of food, even if it is exclusively by way of takeaway or door delivery or through or from any restaurant would be covered by restaurant service. This would thus cover services provided by cloud kitchens/central kitchens.

3.4 Accordingly, as recommended by the Council, it is clarified that service provided by way of cooking and supply of food, by cloud kitchens/central kitchens are covered under “restaurant service”, as defined in notification No. 11/2017- Central Tax (Rate) and attract 5% GST [ without ITC].

On an analysis of the above clarification, the author infers that the striking point by the government for including supply of food by cloud kitchens / central kitchens is the element of preparation of cooked food.

It must however be understood that under GST, tax is levied on the aspect of supply of Goods or services or both.

In case of a restaurant service, the consumer is entering the premises, enjoying the facilities and ambience offered by the place, occupies a table and consumes his food. An inherent intent of consumers therein is the enjoyment of the ambience of that place. However, in case of home delivery, save to the extent of delivery service there is no other element of service as such, and the intent of the consumer is of course to only enjoy the food.

Therefore, in so far there is no element of service, tax on the same should be leviable as supply of goods and not that of service, more specifically so as restaurant service.

A number of judgements in the preceding taxation era also support the view that provision of food in takeaway parcels tantamount to sale of food and there is no service element involved:

• The HIGH COURT OF MADRAS in the case of Anjappar Chettinad A/C Restaurant Joint Commissioner, Office of the Commissioner of GST and Central Excise, Chennai [[2021] 127 taxmann.com 620 (Madras)]
• The CESTAT NEW DELHI BENCH in the case of Lemon Tree Hotel Commissioner, GST, C.E. & Customs [[2021] 127 taxmann.com 247 [New Delhi- CESTAT]]
• The Service Tax Department of Chandigarh vide its letter C.No. ST-20/STD/Misc./ Sevottam/ 62/12/4693 dated August 13, 2015 (“the Clarification”) has clarified that free Home delivery/ Pick-up of food is not liable to Service tax.

The Department explained the matter further by stating that the dominant intention of such transaction is that of ‘Sale’ as food is not served at Restaurant and no other element of service such as ambience, live entertainment (if any), air conditioning or personalised hospitality is offered. It is further stated that Service tax can be levied if there’s an element of ‘Service’ involved which would typically be the case where food is served in Restaurant.

*on 9-9-2015, the Commissioner concerned issued a letter to the Restaurant stating that his previous letter may be treated as withdrawn ab initio.

To further add on to this mayhem, the government in the same circular mentioned supra has also clarified on the applicable GST rate on Supply of ice cream by ice cream parlors as:

4. Supply of ice cream by ice cream parlors

4.1 Representations have been received requesting for clarification regarding the supplies provided in an ice cream outlet.

4.2 Ice cream parlors sell already manufactured ice- cream and they do not have a character of a restaurant. Ice-cream parlors do not engage in any form of cooking at any stage, whereas, restaurant service involves the aspect of cooking/preparing during the course of providing service. Thus, supply of ice-cream parlor stands on a different footing than restaurant service. Their activity entails supply of ice cream as goods (a manufactured item) and not as a service, even if certain ingredients of service are present.

4.3 Accordingly, as recommended by the Council, it is clarified that where ice cream parlors sell already manufactured ice- cream and do not cook/prepare ice-cream for consumption like a restaurant, it is supply of ice cream as goods and not as a service, even if the supply has certain ingredients of service. Accordingly, it is clarified that ice cream sold by a parlor or any similar outlet would attract GST at the rate of 18%.

The government is so cheekily stating that even if there is an element of service involved in case of Ice cream parlors, the same shall be treated as a supply of goods.

Some open issues in this relevance can be:

• What would be the treatment of Ice cream billing in a restaurant. While ice cream parlors do customize and prepare an ice cream in various forms, most restaurants literally just scoop it out of the box into the customer’s table?
• What would be the treatment where an ice cream parlor provides other savories / snacks. Can they in the garb of classification of being an Ice cream parlor sneak away?
• The government has stressed on aspect of cooking of food, as per the circular for classifying as a restaurant service. However, in case of central kitchen, what if the cooked food is received and from the restaurant premises the same is served to the customers as is! Will the Government ease off its stand and allow such establishment to bill the consumer as sale of food and not as restaurant service.
• The “privilege” being given to ice cream parlors will open representations from other food suppliers as well who operate in a similar model and are selling already manufactured food items with maybe even a lesser ingredient of service than an ice cream parlor or no service at all.

This lopsided and biased view is certain to open another pandora’s box of series of litigations as the logic imbibed is without any reasonable merit and is contradictable.