The Directorate General of Goods and Services Tax Intelligence (DGGI) has issued tax notices to around a dozen prominent chocolatiers and bakeries across India, alleging underpayment of taxes between July 2017 and March 2023. The move could lead to significant financial liabilities for the industry, with total dues potentially exceeding ₹1,000 crore, according to sources familiar with the matter.
The businesses in question have been paying 5% GST, believing them to be classified similarly to restaurants. However, the DGGI argues that these entities do not qualify as restaurants and are, therefore, subject to an 18% GST rate. “These entities are not restaurants and are liable to pay GST at the rate of 18%,” a senior official, who wished to remain anonymous, stated.
Over a dozen notices have already been issued by DGGI offices in Mumbai and Ahmedabad, with more expected in the near future. While the individual tax dues for each business may not be substantial, the cumulative impact on the industry could be considerable, especially when penalties and interest are factored in.
Experts have pointed out that the issue revolves around a dispute in tax classification, which could be contested in court. “This classification dispute will have to cross the test of constitutional validity, especially considering the implications of tax cascading when outlets pay 18% GST,” said Abhishek Rastogi, founder of Rastogi Chambers. He noted that, in some cases, adjusting for input tax credits could result in little to no additional tax liability, even at the higher rate.
Similar disputes have arisen in other sectors, with ice-cream parlors previously receiving notices demanding an 18% GST. The ongoing classification ambiguities are a key concern, with experts like Saurabh Agarwal, tax partner at EY, emphasizing the importance of resolving these issues during GST rate rationalization exercises.
The DGGI’s crackdown could have a significant impact on the affected companies, which may face hefty additional tax payments, penalties, and interest, adding further complexity to the already challenging business environment.