GST composition scheme for bakeries

When word bakery comes to your mind, you might think is it a manufacturer or a restaurant, same thought came to me during my last trip to Udaipur, after doing some research I decided to write an article on the above topic, where my intent is to go deep under into the GST implications for bakery businesses, analysing whether they qualify as manufacturers or restaurant service providers, and the consequent applicable composition rates, legal provisions, and practical treatment.

Introduction

In 2017, when the Goods and Services Tax regime was implemented in whole of India, it also brought a major shift in the structure of indirect taxation, especially for small and medium enterprises.

The Government of India actively promotes MSMEs, and to align with this objective, one of the key features introduced under GST is the Composition Scheme. This scheme was specifically designed to ease the compliance burden for small taxpayers, including MSMEs. However, classification challenges continue to arise especially in composite businesses such as bakeries where one often gets confused while distinction between manufacturing activities and restaurant services leading to litigations.

What is the Composition Scheme under GST?

The Composition Scheme is governed by Section 10 of the Central Goods and Services Tax Act, 2017, which allows eligible registered persons to pay tax at a reduced rate based on their turnover but in that case input tax credit is disallowed.

The categories of eligible suppliers

Let us understand the same with the help of table below

For bakery businesses, classification between the above three categories is critical, so that we could get to know whether it is a manufacturer or a restaurant business, hence to know that let’s understand with the definition of Manufacturer.

Definition of “Manufacture”

Section 2(72) of the CGST Act, 2017 deals with the definition of Manufacture stating that:

“manufacture” means processing of raw material or inputs in any manner that results in emergence of a new product having a distinct name, character and use, and includes processes incidental or ancillary to the completion of the manufactured product”.

While analysing above definition, we can say that bakery operations involve mixing, kneading, and baking raw ingredients (such as flour, sugar, etc) and resulting in distinct end-products such as cakes, breads, pastries which are not identifiable with raw inputs.

Clearly, by above analysis we can conclude that the bakery operations qualify as “manufacturing” as the products are prepared in-house for sale.

Bakery is also of two types, first is when it is selling only goods, and second is it is selling goods as well as providing dine in services.

The first case is when the bakery is selling only goods which means it is not providing any dine-in or serving nature of supply, in this case the finished products like cakes, breads, and pastries sold in packaged form, hence there is no facility of consumption on the premises, with no waiters, service, or any type of seating arrangements.

This constitutes the “supply of goods”, not restaurant service.

Now you might be wondering about the applicability of composition scheme in this scenario, such type of bakery is eligible for the 1% composition rate as a manufacturer under Section 10(1)(a).

Supporting notifications of GST department

First one is Notification no. 8/2017, central tax (rate) dated 27.06.2017 which prescribes a concessional CGST rate of 0.5% for eligible registered persons under the composition scheme, specifically those supplying taxable goods (excluding services except restaurant services). It applies to manufacturers and traders whose aggregate turnover does not exceed the prescribed threshold of 1.5 crore. The corresponding SGST rate is also 0.5%, totalling 1% GST.

Second one is Notification no. 1/2018, central tax (rate) dated 25.01.2018which amended the above to prescribe revised rate of 0.5% CGST for manufacturers, aligning CGST + SGST to 1% total.

You might be wondering the difference between both the notifications, let’s understand it with the help of table below

Illustration: If a bakery in Rajasthan has turnover of INR 50 lakhs from sale of cakes, breads, etc. (without dine-in), composition tax payable is 1% of 50 lakhs = 50,000 i.e. INR 25,000 as CGST and  25,000 as SGST.

The second case is regarding the bakery which is providing a dine-In or restaurant service, the nature of supply in this case is the premises with tables/chairs i.e. proper sitting capacity for consumption, items like sandwiches, tea, pastries served by proper staff or might be on self-service basis, this is considered as a restaurant service under GST. This supply falls under heading 9963 of GST Rate Schedule given as per Notification No. 8/2017-Integrated Tax (Rate) dated 28th June, 2017.

It states:

“Supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or drink, where such supply or service is for cash, deferred payment or other valuable consideration, provided by a restaurant, eating joint including mess, canteen, neither having the facility of air conditioning or central air heating in any part of the establishment, at any time during the year and nor having licence or permit or by whatever name called to serve alcoholic liquor for human consumption”.

Applicability of Composition Scheme:

Such a bakery is eligible to opt for composition under section 10(1)(c) as per Notification No. 11/2017 – Central Tax (Rate), dated 28.06.2017

Clarification by department with help of circular:

CBIC circular no. 164/20/2021-GST dated 06.10.2021 clarified by ‘FAQ 3” stating a bakery has takeaway and dine-in. What rate applies? with solution that if food is prepared and supplied as part of restaurant service (even takeaway), it will be taxed at 5% without ITC. If it only sells packed goods, it is taxed as goods.

Thus, mixed bakery outlets (with dine-in) fall under restaurant category even if the customer takes away food.

Mixed supply and composite supply issues

Now what if the bakery does both dine-in and packaged sales? In the case the concept of composite vs. mixed supply under GST applies.

In the case of composite supply as per Sec. 2(30), Principal supply or main good/service governs tax, while in the mixed supply as per Sec. 2(74), the highest rate among supplies applies.

If dine-in service is dominant or a principal supply, then in that case the entire turnover may be taxed at the rate of 5%.

In case the bakery primarily sells packed goods, restaurant service becomes ancillary.

What is happening practically?

Though I am not providing any legal advice but generally the restaurants should maintain the separate invoices, records, and counters for restaurant service (with the tax at the rate of 5%) and for sale of goods which are eligible for 1% rate in composition scheme. This separation is essential to avoid departmental disputes and denial of scheme eligibility in future.

Turnover Limits & Conditions

To avail composition scheme, bakery businesses fulfil a turnover limit which is aggregate turnover should not exceed Rs. 1.5 crore in preceding FY (Rs. 75 lakh for Special category states i.e. Arunachal Pradesh, Assam, Himachal Pradesh, Jammu & Kashmir, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, Tripura and Uttarakhand).

Taxpayers who are ineligible to opt for the Composition Scheme include those who make inter-State outward supplies of goods or services, or supply through e-commerce operators who are required to collect tax at source under Section 52 of the CGST Act. The scheme is also not available to persons engaged in the supply of exempt goods or services. Additionally, composition taxpayers are barred from collecting tax from their customers and from claiming input tax credit on inward supplies.

Declaration for the same is required to be filed in form CMP-02 to opt-in and GST CMP-08 quarterly for tax payment, also both in the case 1% and 5% composition schemes, ITC is not allowed.

If bakery has high input costs (e.g., packaging, equipment), composition may not be beneficial. In such cases, regular registration under Section 9 with full ITC may be more advantageous.

judicial rulings

While there is no direct high court ruling yet on bakery classification under composition, trade associations and advance ruling authorities have upheld that mere sale of cakes/pastries is a manufacture of goods, while the restaurants must have elements of service, like ambiance, seating, waiters, etc.

While some ARAs have ruled mixed bakeries (with dine-in) as restaurant service, thereby disqualifying them from 1% composition scheme.

Conclusion

A bakery only preparing and selling goods (such as cakes, breads etc) qualifies as a manufacturer and can opt for 1% composition under Section 10(1)(a), while a bakery with dine-in service (or even takeaway with service elements) is treated as a restaurant, eligible only for 5% GST but without ITC.

Proper classification, record-keeping, and invoicing are essential for ensuring compliance and to avoid litigation. Circular No. 164/20/2021 and Notifications 8/2017, 1/2018, and 11/2017 must be carefully referred to when advising clients or filing returns.

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