Ice cream, a beloved dessert in India, has become a topic of debate due to the varying tax rates it is subjected to under the Goods and Services Tax (GST) regime. These tax rates differ based on factors such as the type of ice cream, mode of supply, and place of supply. The discrepancies have caused confusion and controversy among ice cream producers, sellers, and consumers. In this blog post, we aim to explore the taxability of ice cream under GST and delve into the reasons behind the different tax rates.
Understanding GST
GST is a comprehensive indirect tax that combines various central and state taxes like excise duty, service tax, value-added tax (VAT), etc. It is levied at each stage of the value chain for the supply of goods and services. GST comprises four tax slabs: 5%, 12%, 18%, and 28%. Some goods and services are exempt from GST or qualify for zero rates.
GST Rate on Ice Cream
Ice cream falls under the HSN code 2105, which encompasses ice cream and other edible ice, whether or not containing cocoa. The GST rate for this category is 18%. However, this rate is not uniformly applicable to all types of ice cream and modes of supply. There are exceptions and variations based on the following factors:
- Type of ice cream: Processed food items like frozen desserts, kulfi, etc., which are not made from milk or milk solids, are subject to a lower GST rate of 5%. This is because they fall under a different HSN code, 2106, which covers food preparations not otherwise specified.
- Mode of supply: Ice cream sold by ice cream parlors or outlets is considered a supply of goods and attracts GST at 18%. However, ice cream served by restaurants alongside food or beverages is considered a composite supply of restaurant service and attracts a GST rate of 5% without input tax credit (ITC). Restaurant service is a special category with a lower GST rate and no ITC benefit. Similarly, ice cream supplied by outdoor caterers alongside food or beverages is also considered a composite supply of catering service and attracts GST at 18% with ITC benefit.
- Place of supply: Ice cream sold by restaurants located within clubs, hotels, inns, etc., where the room tariff exceeds Rs. 7,500 per day per unit of accommodation, is subject to GST at 18% with ITC benefit. This is because such restaurants are not eligible for the lower GST rate of 5% without ITC benefit, which is applicable to other restaurants.
Reasons Behind the Different Tax Rates
The different tax rates on ice cream under GST stem from various considerations:
- Nature of the product: Ice cream made from milk or milk solids is considered a manufactured product that undergoes value addition and processing, resulting in a higher GST rate of 18%. Conversely, processed food items made from other ingredients are considered less processed and more natural, attracting a lower GST rate of 5%.
- Nature of the service: Ice cream sold by parlors or outlets is considered a supply of goods without any service or cooking element involved, leading to a GST rate of 18%. However, ice cream served by restaurants or caterers alongside food or beverages is viewed as a composite supply of service, incorporating an element of service or cooking. Consequently, it attracts GST at 5% or 18% based on the service provider.
- Policy objectives: The lower GST rate on restaurant service aims to provide relief to the general public and boost the hospitality sector. The higher GST rate on ice cream parlors or outlets is intended to ensure tax parity with similar products and prevent tax evasion resulting from misclassification.
Challenges and Implications
The varying tax rates on ice cream under GST pose challenges and implications for different stakeholders, including:
- Ice cream producers: They are required to pay GST at 18% on inputs like milk, sugar, dry fruits, etc., as well as on their ice cream output. While they can claim ITC on their inputs, they cannot do so for their output if they sell it to restaurants or caterers subject to GST at 5% without ITC benefit. This results in an inverted duty structure, leading to the accumulation of excess ITC and cash flow issues for producers. They also face the need to comply with different tax rates and documentation requirements based on the type of ice cream and mode of supply.
- Ice cream sellers: They must charge GST at different rates depending on the type of ice cream and mode of supply. They also need to maintain separate records and accounts for various transactions and customers. Additionally, they face competition from other sellers offering lower prices or better services.
- Ice cream consumers: They encounter varying GST rates based on the type of ice cream and mode of supply. Consumers may bear the burden of higher prices, lower quality, or reduced quantity of ice cream due to the tax impact on producers and sellers. Furthermore, they may experience confusion and lack of clarity regarding tax rates and invoices.
Possible Solutions
The differing tax rates on ice cream under GST have sparked debate and controversy among stakeholders. Some suggested solutions or demands include:
- Uniform GST rate on ice cream: Some stakeholders advocate for a consistent GST rate on ice cream, regardless of the type of ice cream and mode of supply. This would simplify the tax system, reduce compliance costs, ensure tax parity, and alleviate confusion and litigation. However, achieving a consensus among GST Council members, who may have differing views and interests on this matter, would be necessary.
- Refund mechanism for excess ITC: Some stakeholders propose implementing a refund mechanism for the excess ITC accumulated by ice cream producers due to the inverted duty structure. This would ease their cash flow problems, reduce working capital requirements, and encourage increased investment in their businesses. However, establishing a robust verification and audit system to prevent misuse or fraud would be crucial.
- Consumer awareness campaign: Some stakeholders recommend a consumer awareness campaign to educate the public about the different tax rates on ice cream and their implications. This would enable informed decision-making, reduce confusion, and promote the proper acquisition of invoices.
Conclusion
Ice cream, a dessert adored by many, has faced different tax rates under the GST regime in India. These rates vary based on factors such as the type of ice cream, mode of supply, and place of supply. Consequently, confusion and controversy have arisen among ice cream producers, sellers, and consumers. The different tax rates are influenced by the nature of the product, the nature of the service, and policy objectives. These rates have posed challenges such as an inverted duty structure, compliance costs, competition issues, and price impact for various stakeholders. Possible solutions proposed by stakeholders include implementing a uniform GST rate on ice cream, establishing a refund mechanism for excess ITC, or launching a consumer awareness campaign. However, these solutions would require a consensus among GST Council members, a robust verification and audit system, or an effective communication strategy, respectively.