What could possibly be the difference between a cake shop with two tables and four chairs and another without the furniture?

Well, according to the revenue department the answer would be tax arbitrage of up to 13%. So, don’t be surprised to see your corner mithaiwala, halwai or cake outlet owner suddenly rebranding his shop to add ‘restaurant’ and put a couple of tables and chairs in the premises.

A recent tax ruling practically means that GST rate for any food item sold by a shopkeeper would be 5% if there is also a restaurant that run in the same premises. Currently, branded snacks are taxed at 12% and pastries/cakes are taxed at 18%. On the other hand, GST rate inside restaurants is 5%.

An Authority of Advance Ruling (AAR) said in a recent case that if a restaurant is run in the same premises as a sweet shop, GST should be levied at 5%.

GST rate on sweet shops that have a restaurant in their premises would differ. For example, if one was to sell pastry in a pastry shop, it would attract 18% GST. But if there is a restaurant in the premises, the shop owner could claim that all the pastries are consumed by customers who come to the restaurant. And hence GST will be at 5%.

Tax experts point out that this ruling is set to create a lot of confusion but could be a bonanza for many major players like Sarvana Bhavan or Haldiram’s that work on a similar model.

“This decision could require reconsideration as the rates under GST are product-specific and are not generally dependent on the manner of supply. While it is understandable that supplies of sweetmeats by a restaurant could be treated as a restaurant service, the same by a sweetshop on a takeaway basis would normally attract the applicable rate of GST on the products being sold,” said MS Mani, partner, Deloitte India.

The owner of a sweet shop owner — Kundan Misthan Bhandar— had approached AAR to find out whether supply of food items like sweetmeats, namkeen and cold drinks from a sweet shop which runs a restaurant is a transaction of supply of goods or services.

The AAR in the ruling spoke of two concepts in GST framework — mixed supply or composite supply.