Buns, Bills & the Bakery Tax Battle: Decoding GST Composition Scheme for Bakeries

Introduction:

If you think bakeries are all about the sweet aroma of freshly baked bread and icing on cupcakes, think again. Beneath those delicious layers lies a complex web of GST classifications that can either make your business as smooth as fondant or as crumbly as dry shortbread.

Under India's Goods and Services Tax (GST) regime, bakeries straddle a unique position between "manufacturers of goods" and "restaurant service providers." This seemingly harmless classification can determine whether your tax rate is a light 1% or a toasty 5% under the Composition Scheme. So grab your rolling pins and tax ledgers as we slice into the recipe of GST composition treatment for bakeries.

Understanding GST Composition Scheme

Section 10 of the CGST Act, 2017 introduces the Composition Scheme to ease the compliance burden for small taxpayers. Businesses with aggregate turnover up to Rs.1.5 crore (Rs.75 lakh in special category states) can pay a fixed percentage of turnover as tax-without claiming input tax credit (ITC). But, this benefit comes with critical caveats, particularly around classification.

Here’s the basic framework:

Is Your Bakery a Manufacturer or Restaurant?

The real confusion arises when the dough meets the oven. Do bakery operations count as "manufacture" or "restaurant service"? Let’s knead this out.

As per Section 2(72) of CGST Act:

"Manufacture" means processing of raw material resulting in a new product with distinct name, character, and use.

A bakery producing cakes, cookies, or breads from scratch qualifies as a manufacturer under this definition. Hence, if it sells packaged goods (without dine-in), it can opt for 1% GST under Sec 10(1)(a).

Example: A bakery in Jaipur sells Rs.40 lakhs worth of cakes (packaged, no seating). It pays just Rs.40,000 as GST (Rs.20K CGST + Rs.20K SGST).

What if Your Bakery Has Dine-in?

If your bakery offers a cozy corner with air conditioning, tables, waiters, and coffee service-congratulations, you’re a restaurant under heading 9963.

In such cases, supply is not of goods but of restaurant service, even if customers opt for takeaway. This is clarified by:

• Notification 11/2017-Central Tax (Rate): Prescribes 5% GST without ITC for restaurant services.

• CBIC Circular No. 164/20/2021-GST [Para 3]: Takeaway/delivery services from such setups also fall under restaurant services.

Illustration: A Delhi bakery serving on-site pizzas and cakes will be treated as a restaurant and taxed at 5% without ITC under Sec 10(1)(c).

Dealing with Mixed Operations

Many bakeries operate in hybrid mode-selling packaged cakes and also offering dine-in. Here's where the drama thickens like butter cream.

In such cases, classification hinges on the concept of:

• Composite Supply (Sec 2(30)): Principal supply governs rate.

• Mixed Supply (Sec 2(74)): Highest tax rate applies.

If dine-in is dominant, the entire turnover may be taxed at 5%. If packaged goods are the main business and seating is incidental, the bakery may argue for dual classification-but only if proper segregation is maintained.

Pro Tip: Maintain separate billing, counters, and records for goods and services to avoid a GST storm.

Judicial Spotlight: Pioneer Bakers v. Union of India [2024(01)LCX0342]

In this Orissa High Court case, M/s Pioneer Bakers challenged the AAAR’s classification that denied them the benefit of "restaurant services" for GST purposes.

Key Facts:

• The bakery offered dine-in, custom orders, and aesthetic service.

• Authorities relied on a report (based on lockdown-era inspection) stating most food was sold as takeaways.

High Court Verdict:

• AAAR order was set aside due to violation of natural justice.

• The report used was not shared with the assessee-hence, no opportunity to rebut.

• Case remanded for fresh hearing.

Legal Takeaway: When classification affects rights, principles of natural justice must be honored. You can't slap someone with tax and not let them explain their frosting.

Common Practical Issues

Record Maintenance: Dual classification requires meticulous records. Separate invoice books, GST returns, and counters help.

Interstate Sales or Ecommerce: You’re disqualified from the Composition Scheme if you make interstate supplies or sell through Flipkart/Zomato-type platforms collecting TCS.

Turnover Tracking: Stay within the Rs.1.5 crore (or Rs.75 lakh) limit.

Declaration Compliance: Opt-in via CMP-02. Pay quarterly via CMP-08. File annual GSTR-4.

No ITC: Composition taxpayers cannot claim input tax credit. If your input costs (equipment, raw materials) are high, composition may be uneconomical.

Strategic Decision: Should You Opt In?

Choose Composition Scheme if:

• You sell only packaged goods.

• You have low input costs.

• Your turnover is under the threshold.

Avoid Composition Scheme if:

• You serve dine-in food as core business.

• You want to claim ITC on equipment or input services.

• You make inter-state sales or supply through online platforms.

Tips for Compliance (or Avoiding a Tax Burn)

1. Display a board: "Composition taxpayer – not eligible to collect tax."

2. Don’t collect GST from customers.

3. Avoid clubbing restaurant sales with packaged goods turnover unless properly segregated.

4. Get a professional opinion if you’re unsure-advance rulings can help (but may also go sideways, as in Pioneer Bakers).

Conclusion:

Bake It Right, or Face the Tax Bite!

The GST Composition Scheme may seem like a cherry on top for small bakeries, but improper classification can lead to a tax mess messier than a flour explosion. The trick is knowing your primary business-whether you're a manufacturer of muffins or a restaurant for red velvet lovers.

With the right strategy, paperwork, and compliance, you can enjoy the sweet side of simplified taxation while avoiding bitter disputes.

Disclaimer: The information given in this article is solely for purpose of understanding the law. It is completely based on the interpretation of the author and cannot be constituted as a legal advise, the author of this article and Lawcrux team is not responsible for any legal issues if arises on the basis of the interpretation given above.