India – Banana Bytes: A Classification Conundrum Under GST.

29 August, 2019

 

A recent social media post by an Indian actor depicting an invoice issued by a prominent hotel where he was charged INR 442 for two bananas created widespread furor among the public, industry players and the tax authorities, with certain quarters challenging the legality of levy of Goods and Service Tax (“GST”) itself on the supplies made. The invoice indicated the description of the sale item as a ‘fruit platter’ and the cumulative rate of GST as 18%. The Central Excise & Taxation Department also swung into action, served a show cause notice to the hotel and imposed a penalty of INR 25,000 for levying GST on sale of bananas. According to the department, serving bananas to the customer in a hotel room was an exempt supply of goods, not involving any element of service.

 

The banana row brings to light the classic conundrum of classification of composite supplies and consequent rate of GST applicable to such supplies. Composite supplies refers to supplies of two or more taxable supplies of goods or services or both, which are naturally bundled and supplied in conjunction with each other in the ordinary course of business, one of which is a principal supply (for example, supply of an air-conditioner coupled with delivery and installation at the customer’s premises would be a composite supply with supply of air-conditioner being the principal supply). The rate of tax in case of a composite supply is the rate applicable to the principal supply.

 

The following possible variants of supply arise in the banana example itself:

 

• Supply of bananas by retail stores / street vendors; and
• Supply of a fruit platter comprising bananas only.

 

The classification of the above supplies is treated differently under the under the GST legislations and consequently impacts the rate of tax applicable to the supply.

 

• Supply of bananas by retail stores / street vendors

 

When bananas are purchased from retail stores / street vendors, it constitutes a supply of goods, which is exempted from levy of GST under the GST legislations. This act of going to a retail store or a street vendor and purchasing bananas cannot be compared to the act of ordering bananas through room service in a hotel. Where bananas are served to the customer in a hotel room, the transaction involves the sale of bananas along with a supply of services such as provision of cutlery / crockery, delivery services, room services etc. Therefore, in such a situation it becomes imperative to determine if the supply constitutes a composite supply as per the provisions of GST law. If it does constitutes a composite supply, then the transaction would be categorized as supply of service and the rate of tax applicable to service would be applicable.

 

• Supply of a fruit platter comprising bananas only

 

When a fruit platter is served to a customer in his room by a hotel, the process involves various elements of services such as slicing of fruits, arranging the slices in a pattern, delivery of fruit platter and supply of room services. Therefore, serving of a fruit platter in a room constitutes a composite supply with supply of restaurant service being the principal supply. However, hotels also give the customers an opportunity to customize the offerings. Therefore, where a customer orders a fruit platter specifying that he / she only wants bananas or give specific instructions that the kitchen should not peel / slice etc., the question which arises for consideration is whether this should continue to be regarded as a composite supply.

It is interesting to juxtapose this example with the example of a hotel providing additional facilities such as gym and laundry services to its customers but customer not availing the services.

 

While the hotel is not charging anything separately for these facilities, the fact that the customer avails or does not avail these services does not affect the classification under the GST laws.

 

Thus in the banana example, where a customer did not avail the facility, one may argue that the classification under the GST laws should not change. The statement of Federation of Hotel & Restaurant Associations of India justifying the levy of GST at 18% on the sale of bananas does therefore seem to have merit.

 

Closing remarks

 

Given the tax arbitrage available to the registered suppliers and the taxpayers on account of multiple rate slabs, classification particularly for composite supplies continues to be a contentious issue. The incident has created a cloud of uncertainty over the classification of supplies made by the hospitality industry, wherein some element of service is always involved.

 

As these supplies are recurring in nature, it is vital for the industry players to examine the nature of supply meticulously before classifying it as supply of good / service under GST legislations and consequently determining the applicable rate of GST. The cost of non-compliance even for genuine mistakes in the age of trial-by-social-media is not just a simple fine but includes tremendous reputational damage.

 

This incident not only heralds the need for a reduction in the number of GST slabs to minimize such controversies, but has also kick started a trend of people resorting to social media to share invoices issued by the leading hotels of the country and alleging exorbitant pricing on various supplies. The most recent incident in the thread was an Indian author posting a picture of an invoice issued by one of the prime hotels charging INR 1,700 for two boiled eggs on his social media account. It was unclear whether the issue revolved around pricing of boiled eggs itself or the nature of supply for the purposes of levy of GST.

 

The Union Minister of Consumer Affairs, Food and Public Distribution has now taken cognizance of the concerns to determine whether unfair pricing practices are being followed.