A court in India is hearing a case that decides whether doughnuts should attract 5 or 18 per cent tax, in a case that could have significant implications for India's restaurant and bakery industries.
At the core of the dispute is whether doughnuts should be taxed as part of restaurant services, which carry a five per cent charge under India’s Goods and Services Tax (GST), or as standalone bakery products, which fall under the 18 per cent GST bracket.
This comes after the Indian arm of doughnut chain Mad Over Donuts challenged a notice from India’s Directorate General of Goods and Services Tax Intelligence (DGCI) that held them guilty of tax evasion for incorrectly classifying their business as a restaurant service and ordered them to pay more than Rs1bn in dues.
A similar notice was also served to chains Dunkin’ Donuts, Theobroma, and Krispy Kreme.
The notice stated that the DGCI, during its investigation, questioned the head chef of Mad Over Donuts, who allegedly said that the doughnuts are prepared in a central kitchen and then sent to individual outlets, according to The Economic Times. At these outlets, “garnishing, chocolate pouring, and packing” are done before an item is sold, thus the products are sold “over the counter”.
On Monday, the Bombay High Court’s division bench of Justices BP Colabawalla and Firdosh P Pooniwalla heard the petition from Himesh Foods Pvt Ltd, the parent company of Mad Over Donuts.
Mad Over Donuts maintained that it meets the criteria for it to be classified as a restaurant, since all its outlets have a kitchen to heat the items sold and the doughnuts go through a final preparation before sale.
The Indian law enforcement agency argued that the kitchens at these outlets are “stretching the definition of service beyond” the guidelines under the GST act, and any garnishing of the doughnuts before they are served is “nothing but to make the said products attractive for the customers before selling them over the counter, similar to the types of sweets prepared by confectioners with various coatings and spreading different dry fruits over it”.
Advocate Abhishek Rastogi, representing Mad Over Donuts, pointed to that GST notifications that categorise food sold at restaurants, eateries, messes, and canteens under the 5 per cent tax bracket, irrespective of whether they are eaten on-site or taken away.
“If for some reason, this order is not dealt pragmatically then there are high chances of disruption for the food and beverages sector,” he added.
The court ruled that no coercive action can be taken against Mad Over Donuts while the case is pending, and listed it for hearing on 24 March.
Over the last few years, India has seen a few other tax classification disputes. The most notable took place in September 2022, when the authorities insisted that frozen Malabar parottas (a layered flatbread cooked primarily in southern Indian states Kerala and Tamil Nadu) should be taxed at a higher rate than frozen rotis (a round flatbread) since they took longer to cook and therefore could not be classified as ready for consumption.
A similar controversy erupted over popcorn last year, after Indian finance minister Nirmala Sitharaman announced that caramel popcorn would be taxed at a higher rate than regular salted popcorn, since “anything with added sugar attracts a different tax rate”.
The United Kingdom too saw a dispute of a similar nature over three decades ago – the famous legal battle over Jaffa Cakes, where the courts deliberated over whether they were biscuits, which are taxed at 20 per cent or cakes, zero-rated for Value Added Tax (VAT). McVitie’s, the company that makes the Jaffa Cakes, argued that Jaffa Cakes harden when they go stale, like cakes, unlike biscuits which went soft and soggy.
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