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A recent ruling on the goods and services tax led to pizza lovers expressing quite strong emotions on social media. While the love of pizza is understandable, the issue of higher tax on toppings is a bit more nuanced.

The Haryana Appellate Authority of Advance Ruling or AAAR ruled last week that an 18% goods and services tax rate applies to pizza toppings.

The ruling should not specifically affect the classification and resulting tax rate for pizza delivered by restaurants, said Prashanth Agarwal, partner at PwC India. “The ruling specifically pertains to the GST rate of pizza toppings and it should not affect the GST rate applicable to the delivery of pizza by restaurants,” Agarwal added.

What was disputed was the classification of pizza toppings and the resulting tax rate.

Khera Trading Co., which sells pizza toppings under the Goodrich brand, approached the Advance Ruling Authority to clarify the applicable GST rate.

The GST law prescribes specific rates for different foods. Those not specified are taxed at an 18% rate as “food preparations not specified or included elsewhere”.

The company’s argument was that its product consists of 14.5% mozzarella, which gives the essential character of its pizza topping. And that the topping is a type of cheese that is taxed at 12%.

The AAR disagreed, noting the list of ingredients in Goodrich’s pizza topping. Vegetable fat, it pointed out, makes up 22% of the ingredients. And so the pizza topping can’t claim to be some kind of cheese, the AAR opined.

The AAAR also came to the same conclusion on the company’s appeal.

The AAAR considered all the ingredients used in the topping and believed that while a pizza topping is sold as a “cheese topping”, it is not actually cheese and therefore the higher tax rate of 18% applies.

Tax experts with whom BloombergQuint spoke explained that when the GST for a product is not specified, the rate classification is performed based on three tests: the general language test, the end-use test or the key ingredient testing.

“In this judgment, AAAR passed the key ingredient test to clarify that pizza toppings cannot be classified as ‘cheese’,” said Jigar Doshi, founder of Tax Technology Managed Services LLP.

Agarwal said the potential impact for restaurants could be on the cost of purchasing the pizza toppings, which would increase – if their suppliers previously charged a lower GST rate of 12% and now charge 18% because of this ruling.

“This is because restaurants are generally not eligible for GST credits and therefore the GST they pay for purchasing is a cost.”

With this, Agarwal also implied that companies should be more careful when reviewing their positions to ensure that the goods and services are properly classified in order to reduce any tax exposure. “The verdict once again emphasizes the importance of classifying goods under GST and potential lawsuits that may arise,” he said

The company’s Supreme Court remedy is technically unlikely, Doshi said. “The Appeals Tax Office has given quite extensive reasons for classifying the product (pizza toppings) under the heading ‘food preparation’, which is subject to a tax rate of 18%.”

The impact of higher inputs without tax cuts on restaurants will obviously hit inflation for pizza lovers, he added.

This post GST: Pizza Lovers, Take it easy

was original published at “https://www.bloombergquint.com/gst/gst-pizza-lovers-18-pizza-topping”