More than a dozen bakery and chocolate companies have been served notices that allege significant underpayment of Goods and Services Tax (GST) from July 2017 to March 2023, according to a report by The Economic Times (ET).The notices by the Directorate General of Goods and Services Tax Intelligence (DGGI) have sparked concerns in the industry. The issue revolves around the GST rate applicable to these businesses. The companies in question have reportedly been paying a 5 per cent GST, which is the rate typically applicable to restaurants. However, the DGGI contends that these establishments do not qualify as restaurants and should therefore be subject to an 18 per cent GST rate.

DGGI offices in Mumbai and Ahmedabad have served notices to well-known brands. The source cited in the ET report hinted that additional notices could be forthcoming as the investigation progresses.

While the individual tax dues for the companies under scrutiny may not be substantial, the overall liability for the industry could exceed Rs 1,000 crore, excluding potential penalties and interest.

Similar classification disputes have arisen in the past, with ice cream parlours also receiving notices from the DGGI, requiring them to pay an 18 per cent GST rate instead of the lower rate they had been applying.

The situation highlights ongoing challenges within the GST framework, particularly concerning the classification of goods and services.

The DGGI's crackdown could have a significant impact on the businesses involved, potentially resulting in substantial additional GST payments, penalties, and interest.

This classification dispute could lead to legal challenges as the DGGI's actions might be contested in court, especially concerning the constitutional validity of the tax imposition. In cases where the credit availability is adjusted, the output tax liability at the higher rate could be minimal or even non-existent.