A recent Goods and Services Tax ruling led to pizza lovers expressing some rather strong emotions on social media. While the love for pizza is understandable, the issue of higher tax on toppings is a little more nuanced. 

The Haryana Appellate Authority of Advance Ruling or AAAR last week held that a goods and services tax rate of 18% is applicable on pizza toppings.

The ruling should have no specific bearing on the classification and consequent tax rate for pizza supplied by restaurants, Prashanth Agarwal, partner at PwC India, said. “The judgment is specifically on GST rate of pizza toppings and it shouldn’t impact the GST rate applicable on supply of pizzas by restaurants,” Agarwal added.

What was being contested was the classification of pizza toppings and its consequent tax rate. 

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

The GST law prescribes specific rates for various food products. Those that aren’t specified get taxed at a rate of 18% as “food preparations not elsewhere specified or included”.

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

The AAAR disagreed, and noted the list of ingredients in Goodrich’s pizza topping. Vegetable fat, it pointed out, constitutes 22% of the ingredients. And so, the pizza topping cannot claim to be a type of cheese, the AAR held.

On the company’s appeal, the AAAR also came to the same conclusion.

It is evident that the item contains ‘vegetable fat’ as a substantial portion, being 22% of the ingredients, apart from mozzarella cheese which is only 14.5% of the combination of ingredients. Thus, the impugned item mainly comprises ‘vegetable fat’. Therefore, the product does not qualify to be categorised as 'processed cheese' or a type of cheese.

- Haryana AAAR order

The AAAR considered all the ingredients used in the topping and opined that while a pizza topping is sold as a “cheese topping”, it’s not exactly cheese and hence, the higher tax rate of 18% is applicable.

Tax experts BloombergQuint spoke with explained that when GST for a product isn’t specified, rate classification is done on the basis of three tests: common parlance test, end-use test, or key ingredients test. 

“In this judgment, AAAR has adopted the key constituent test to clarify that pizza toppings cannot be classified as ‘cheese’,” Jigar Doshi, founding partner at Tax Technology Managed Services LLP, said.

The fact that vegetable oil constituted 22% was not only the "decision-maker" in the case. The percentage of mozzarella cheese in the product is only 14.5%, and that’s not substantial enough. Ideally, any component other than cheese should not have stood out. Rule 3 of HSN interpretation basically made vegetable oil an essential character and that hampered the appellant’s argument to treat the product as processed cheese.

Jigar Doshi, Founding Partner, TTMSL

Agarwal said that the possible impact for restaurants could be on the procurement cost of the pizza toppings, which would increase — if their vendors were earlier charging a lower GST rate of 12% and now because of this ruling, start charging 18%. 

“This is because restaurants generally are not eligible to avail GST credits and hence, the GST paid by them on procurements is a cost.”

With this, Agarwal also implied that companies have to be more careful in reviewing their positions to ensure the goods and services are correctly classified to mitigate any tax exposure. “The judgment again highlights the importance of classification of goods under GST and possible litigation that may arise,” he said

Separately, the government should aim to simplify the tax rate structure under GST. This would help in reducing classification-related challenges.

Prashanth Agarwal, Partner, PwC

The remedy for the company before the High Court is technically unlikely, Doshi said. “The appellate tax authority has quite extensively given the reasons for classifying the product (pizza toppings) under the head ‘food preparation’ which attracts a tax rate of 18%.”

Impact on higher input with no input tax credit on restaurants will obviously hit the inflation for pizza lovers, he added.

Let the outrage on pizza topping being sold as cheese topping begin.