Circular clarifying that the supply of ice cream by parlours will attract 18% goods and services tax

What does the Circular provide?

Ice Cream Parlours are liable to pay tax at the rate of 18% on sale of Ice Creams

Implications?

• Ice Cream Parlours not to be treated as restaurants and hence they should not charge GST at the rate of 5%

• Scoops, Sundaes, Family Packs – All will be liable to tax at the rate of 5%

• Since the tax is required to be charged at 18%, Ice Cream Parlours will be entitled to claim credit of GST paid on purchase of Ice Creams, Rent of the premises, refrigeration charges etc

• Even for taxpayers with turnover of less than Rs 1.5 Crores and who has opted for payment of tax under composition scheme, the tax needs to be discharged only at 1% and not 5%

• However, in-house manufactured / prepared Ice Cream will continue to be treated as service and liable to tax at 5%

Action Steps – Past Period

• If the taxpayer was under Composition Scheme and discharging tax at the rate of 5% - Immediately file for refund of excess tax of 4%

• If the taxpayer was paying taxes under regular scheme at 5% - Immediately avail credit of the input tax credit related to April 2020 to March 2021 (last date is October 20, 2021)

Action Steps – Going Forward

• If the expected turnover is less than Rs 1.5 Crores – Opt for composition scheme and pay tax at concessional rate of 1% (without ITC benefit)

• In other cases, prepare a cost benefit analysis to analyse the impact on costing

Illustration 1 – Considering an Annual Sale of Rs 2 Crores

Tax Cost	Continue under 5% (without ITC)	Shift to 18% (with ITC)
Tax Paid on purchase of Ice Creams	18 Lakhs	NIL – Credit Available
Tax Paid on Other Procurements (Logistics Cost, Rent, Office Establishments, Capital Machine etc)	5 Lakhs	NIL – Credit Available
Tax Paid on Sale of Ice Creams	​10 Lakhs	36 Lakhs
Total Tax Impact	​33 Lakhs	36 Lakhs

In the above situation, the Ice Cream Parlour should consider the following issues

• Continue charging tax at the rate of 5% without ITC – Department Notice for the differential 13% and permanent loss of ITC claim

• Switch from 5% to 18% and rework on costing by reducing the per serving cost by the credit available and increase the cost by 13% to cover additional cost

Illustration 2 – Considering an Annual Sale of Rs 2 Crores

​Tax Cost	​Continue under 5% (without ITC)	​Shift to 18% (with ITC)
Tax Paid on purchase of Ice Creams	​18 Lakhs	​NIL – Credit Available
​Tax Paid on Other Procurements (Logistics Cost, Rent, Office Establishments, Capital Machine etc)	​10 Lakhs	NIL – Credit Available
Tax Paid on Sale of Ice Creams	​10 Lakhs	36 Lakhs
Total Tax Impact	​38 Lakhs	36 Lakhs

In the above situation, the Ice Cream Parlour should consider the following issues

• Switch from 5% to 18% and rework on costing by reducing the per serving cost by the credit available and increase the cost by 13% - Effective cost of serving the Ice Cream will be reduced which can be passed on to the Customer or retained by the business which will increase their profitability

We hope that this Tax Alert was helpful to you. In case of any clarification, feel free to reach out to us by following the link www.hskaadvisors.com/contact