SUPPLY OF HOOKAH FOR SMOKING IN FOOD COURTS., Goods and Services Tax - GST

[Sadanand Bulbule]

Dear Sir/s

Following is the query.

Here in Bengaluru in one of the food courts,in addition to the supply of food & drinks, there is also the facility of supply of " assorted hookah flavours" to the desired smokers for smoking in the said premises. The food court is charging 5% GST on the supply value of food& drinks without availing ITC.However the food court is purchasing " assorted hookah flaours " the classified tobacco product from the local vendor who is charging 28% GST and 72% Cess as notified and classified as Tobacco products under HSN. 2403 11 10. But while re-supplying assorted hookah flavaours, the food court is charging only 5% GST separately on the value of hookah and for the supply of food& drinks and hookah flavours.

My understanding is "hookah flavours" being specific tobacco product unconnected with food& drinks does come under classification of supply of food & drinks eligible for 5% GST with or without ITC. Mere change in the location of supply of hookah as such would not alter the rate of GST with the nature of hookah flavours being intact till it is supplied to the desired smoker. The value of addition is very very huge in respect of re-supply of hookah flavours in the hands of the food court. Therefore it may be an attempt to escape the higher rate of GST at 28% with 72% Cess on the outward supply value of such hookah flavours.

Kindly enlighten whether this kind of practice of charging reduced rate of GST at 5% on the outward supply hookah flavours by the food court to end smokers for smoking in its business premises is right? And under what provisions?

Profound regards.

Posts / Replies

[Ganeshan Kalyani]

In my view, it is composite supply and therefore rate of main supply will apply.

[KASTURI SETHI]

Full facts are not known to me in this query. However, main issue is whether hookah flavour is a part of composite supply or not. If hookah flavour is part of composite supply, 5% rate is correct and the valuation aspect also appears to be in order.

[KASTURI SETHI]

In continuation of my reply dated 21.9.2019 at serial no.2 above, an illustration is given below:-

Suppose one visits restaurant for lunch and thereafter he orders for cigarettes. The owner of restaurant supplies cigarettes. The owner supplies one or two cigarette or one pack. This supply of cigarette is not 'as such' it is being sold in retail in pieces. Food is his main (primary) supply and supply of cigarette is secondary supply. Thus it becomes a composite supply and rate of main supply is applicable as rightly opined by Sh.Ganeshan Kalyani, Ji.

Had the restaurant owner sold a carton of cigarette or hooka flavours independently/separately, then such supply would have attracted higher rate of tax (GST 28% plus 72% cess) after value addition as suggested by the querist.

It is natural that if GST is paid @ 5% , no ITC would be taken.

[Sadanand Bulbule]

Sethi Sir

Very Good Morning.

In continuation of your additional clarification, the following facts are offered for ease of understanding the issue under reply.

The business place is a high end Cafe supplying hookah flavours and the supply of coffee,tea,snacks etc., independently. They are not in conjunction with each other. The charges for one flavour of hookah is ₹ 1000/- and for snacks or coffee, the charges range from ₹ 150/- to ₹ 300/- There is also combo offers like, if anyone takes two hookah, two coffees are supplied as complimentary and the so on. The prices are charged along with 5% GST for hookah and snacks separately in a single Tax Invoice.

One actual example:

The total amount of ₹ 1612/- is shown at the bottom of the bill indicating separately, ₹ 1000/- as cost of hookah, food cost ₹ 435/- , ₹ 100/- towards Service Charges ( it is nothing but TIPS at gunpoint) and ₹ 38.38 SGST and CGST each for the whole amount @ 2.5%. In this scenario, whether dealer though not claiming ITC both on hookah & food times purchases, is he entitled to charge and collect GST 5 % ? The value addition in respect of hookah is 20 times.

As observed by the experts, would it still be Composite Supply or can be classified as Mixed Supply? Clarification is solicited since revenue implications are very huge.

Happy Sunday.

[Sadanand Bulbule]

Pl read food items in place of food times.

[KASTURI SETHI]

It is not ethical for me to go beyond what I have already expressed. There is no dearth of learned Advocates and Consultant for an assessee to consult and there is no dearth of learned officers in the department to detect short payment of tax. I should mind my own business.

[Sagar Phadke]

Dear Sir,

I have come accross a similar case where the dealer claims that the hookah substance is purely herbal and doesnot contain tobacco. Presuming his claim to be true.... the entry of restaurant service prescribing 2.5% GST gives reference to explanation (iv) wherein the term "restaurant service" is defined as follows-

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.

I feel that hookah is a method of consuming a substance by human through process of inhalation. Further the food court offers this purely as a service for consumption at that restaurant place only and not as a take away.

Therefore this may fit into 5%, though I personally felt otherwise initially, and I have apprehensions as to what will be the outcome if those substances are lab tested.

My intention was purely to discuss about what else could be the legislative intention behind putting the words any other article for human consumption between Food and Drink. They could have simply said foods and beverages, but they have chosen other set of words.

Bye the way this term emanates from entry 29A of Article 366 of the Constitution of India.

Regards

Sagar Phadke

[Sadanand Bulbule]

Dear Phadke ji.

At the out outset, accept my compliments for your presentation of the issue under discussion. In this regard I offer my further understanding of the trade practice prevailing in this particular business, which I have personally witnessed in one of the finest restaurants. It is like this:

1. For example, the restaurant called A effects inward supplies of hookah flavours from B, a trader and pays GST of 28% including 72% Compensation Cess, since the particular product is branded. As such it is clear that the nature of supply made by B is supply of goods in the form of hookah flavours and thus this is a sale of goods in terms of Section 2(52) of the CGST Act, 2017 defines “goods”.

2. Section 2(102) of the CGST Act, 2017 provides for definition of services.

3. Facts being so, outward supply of hookah effected by A to end consumers cannot be determined as supply of goods since there is no transfer of ownership in goods to the end customers. It is accepted fact that, hookah in the form of a water pipe is given to the customer to consume the essence / flavour added in the head of the instrument with burning char coal through the mouthpiece. This mode of inhalation of the flavour by the customer which is served as hookah cannot be regarded as supply of “goods” under the GST Act.

4. Here one needs to understand that hookah is not supplied the way it is bought. The supply and consumption process is all together different.Thus, there is no match between the inward supply with outward since both are diagonally opposite in nature and composition. As rightly said by you, the hookah supplies may be tobacco free and contain herbal flavours.

5. Now assuming for the sake of academic discussion that, hookah does contain some percentage of tobacco. Then the moot question is whether the supply of such hookah to the end consumers is branded or unbranded to determine the rate of GST and Cess? Because branded hookah attracts 72% Cess and unbranded attracts 17% Cess besides GST @ 28%. Therefore your suggestion to get Hookah tested from the authorised technical laboratory may bring extra clarity regarding hookah with the percentage of tobacco or otherwise to decide the rate of GST. The second question is about the rate of Cess, either 72% or 17% on such supplies. In my opinion the concept of branded or unbranded supply of hookah would remain debatable/disputable until the prevailing supply practice of hookah is practically demonstrated to the satisfaction of the adjudicating authority.

Regards.

[Sagar Phadke]

Greetings.

Following reply is limiting itself for non-alcoholic inhalation substance.

Firstly , It is interesting to read - Sch II of CGST of Act

No. 6 (b) of Schedule II to the CGST Act: supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (other than alcoholic liquor for human consumption), where such supply or service is for cash, deferred payment or other valuable consideration.

Further to that we need to understand that -

only a) Petroleum products b) Alcohole for human consumption c) Electricity are kept out of the purview of GST. Even Tobacco is also within GST.

And restaurant service is specifically defined in rate notification at expl, (iv) as discussed earlier.

Considering the above overall situation -

In my opinion, for "restaurant service", we have to, in our mind, disconnect the input - output relationship, as long as output supply fits into the definition of "restaurant service". In fact there may be many input supplies which are tax-free like fresh vegetables, or some may be taxable at different rates. Once they get converted into Food or Articles of Human Consumption or Drink and they are served for consumption at restaurant, earlier identity of those inputs would become irrelevant. And they would be attracting tax at 5% without ITC. Senior experts of the group may also please opine on this point of view.

[Sadanand Bulbule]

True Sir. Churning of misunderstood transactions would sprout the real intent of legislation. But till then the affected person has to undergo the furnace of adjudication.

[Sagar Phadke]

Yes.

Bye the way, what a great Quote

Churning of misunderstood transactions would sprout the real intent of legislation. But till then the affected person has to undergo the furnace of adjudication.

Really we think of this while advising our clients, but this statements puts it finely. Would like to use this with your permission.. :-D

[Sadanand Bulbule]

Sir, it's not quote. Just I expressed it spontaneously. I am the happiest person if you refer it. In fact I should thank you for your generosity. Many a times I have told let this discussion forum be a great gateway for exchange of multi dimensional experience via queries and attempts to answer it. 👏👏