Chocolate companies and bakeries have been issued notices for allegedly underpaying GST.

The Directorate General of Goods and Services Tax Intelligence states that chocolatiers and bakeries are not classified as restaurants and are therefore required to pay 18% GST instead of 5%.

According to a report by The Economic Times (ET), over a dozen bakery and chocolate companies have received notices alleging significant underpayment of Goods and Services Tax (GST) from July 2017 to March 2023. These notices from the Directorate General of Goods and Services Tax Intelligence (DGGI) have raised concerns within the industry. The core issue is the applicable GST rate for these businesses. The companies have reportedly been paying a 5% GST rate, which is typically applied to restaurants. However, the DGGI argues that these businesses do not qualify as restaurants and should therefore be paying an 18% GST rate.

DGGI offices in Mumbai and Ahmedabad have issued notices to several well-known brands. According to the source cited in the ET report, more notices may be issued as the investigation continues.

Although the individual tax amounts owed by the companies under investigation may not be large, the total liability for the industry could exceed Rs 1,000 crore, not including possible penalties and interest.

Similar classification issues have occurred in the past, such as ice cream parlours receiving notices from the DGGI requiring them to pay an 18% GST rate instead of the lower rate they were applying.

This situation underscores the ongoing challenges within the GST framework, especially regarding the classification of goods and services. The DGGI's enforcement could significantly affect the businesses involved, potentially leading to substantial additional GST payments, as well as penalties and interest.

This classification dispute could result in legal challenges, as the DGGI's actions may be contested in court, particularly regarding the constitutional validity of the tax imposition. In situations where credit availability is adjusted, the output tax liability at the higher rate could be minimal or potentially eliminated.