The petition is based on the concern of receiving notices requiring them to pay the higher charge retroactively from July 1, 2017 — when India switched to the GST regime — rather than the 5% they had been paying up to that point. If the tax is imposed retroactively, the amount will be enormous and unsustainable for these companies.
The imposition of an 18 percent goods and services tax on ice cream supplies, with retroactive effect from July 2017, has put hundreds of ice cream parlours out of business, the majority of which are small enterprises.
After being hit by the COVID-19 pandemic, which forced many businesses to close over the last year and a half, ice-cream makers have asked the finance ministry to freeze the levy prospectively, claiming that if the tax is imposed retrospectively, they, too, will go bankrupt and be forced to close operations nationwide.
The Indian Ice-cream Manufacturers’ Association (IICMA) has written to the finance ministry, requesting that the fee be reconsidered and implemented from October 2021, rather than the four years previously.
“We request that the Central Board of Indirect Taxes and Customs kindly take steps to either clarify that the GST rate of 18 percent on supply of ice cream by ice-cream parlours would have only prospective effect” or, “if necessary, amend the notification” to apply the rate of 5% for the period from July 1, 2017 to the date of the latest clarification (October 6, 2021), according to the letter, which ET has seen.
The petition is based on the concern of receiving notices demanding that they pay the higher fee retroactively from July 1, 2017, when India switched to the GST regime, rather than the 5% they had been paying up to that point. If imposed retroactively, the cost would be enormous and unsustainable for these people.
Because profit margins are so small, most ice cream parlours would be unable to pay the difference of 13 percentage points in GST (18 percent minus the 5 percent they have so far collected from customers) out of their own finances for the last more than four years, according to the body.
Since all ice cream suppliers have adopted the 5% rate, no one is taking the input tax credit on supplies, according to the advocacy organisation, therefore any payment must now be made from their own funds.
Even while the supply of ice cream manufactured by ice cream parlours had certain ingredients of service, the tax authority said earlier this month in a circular that the supply of ice cream made by ice cream parlours was a “supply of commodities” and not a “service.” As a result, rather than the 5% rate that applies to restaurant services, the supply is taxed at 18%.
The ice cream manufacturers’ lobby outlined the contrast it faced with large hotels or restaurants that provide the same ice cream but are exempt from paying the differential GST because they also cooked and supplied food from the same premises, despite the fact that such activity of cooking on the premises is never contemplated by the law.
It claimed that “pushing small enterprises out of business would be a travesty of justice.”
Experts endorsed the government’s request, claiming that imposing additional costs on a small-scale industry made up largely of single-location businesses would hurt their profitability during a liquidity constraint.
“The issue of retrospective explanations resulting in a hike in the effective GST rates on B2C firms puts them in a lot of trouble because they have already charged and passed on the lower rate of GST,” MS Mani, senior director at Deloitte India, explained.
Any new burden now, at the conclusion of a pandemic-induced slump, will further erode their profitability, he continued.
“The significant point is that the rate change came in the form of a circular, implying that the increased tax rate will apply retroactively.”