MUMBAI: What could possibly be the difference between a cake shop with two tables and four chairs and another without the furniture?Well, according to the revenue department the answer would be tax arbitrage of up to 13%. So, don’t be surprised to see your corner mithaiwala, halwai or cake outlet owner suddenly rebranding his shop to add ‘restaurant’ and put a couple of tables and chairs in the premises.A recent tax ruling practically means that GST rate for any food item sold by a shopkeeper would be 5% if there is also a restaurant that run in the same premises. Currently, branded snacks are taxed at 12% and pastries/cakes are taxed at 18%. On the other hand, GST rate inside restaurants is 5%.An Authority of Advance Ruling (AAR) said in a recent case that if a restaurant is run in the same premises as a sweet shop, GST should be levied at 5%.GST rate on sweet shops that have a restaurant in their premises would differ. For example, if one was to sell pastry in a pastry shop, it would attract 18% GST. But if there is a restaurant in the premises, the shop owner could claim that all the pastries are consumed by customers who come to the restaurant. And hence GST will be at 5%.Tax experts point out that this ruling is set to create a lot of confusion but could be a bonanza for many major players like Sarvana Bhavan or Haldiram’s that work on a similar model.“This decision could require reconsideration as the rates under GST are product-specific and are not generally dependent on the manner of supply. While it is understandable that supplies of sweetmeats by a restaurant could be treated as a restaurant service, the same by a sweetshop on a takeaway basis would normally attract the applicable rate of GST on the products being sold,” said MS Mani, partner, Deloitte India.The owner of a sweet shop owner — Kundan Misthan Bhandar— had approached AAR to find out whether supply of food items like sweetmeats, namkeen and cold drinks from a sweet shop which runs a restaurant is a transaction of supply of goods or services.The AAR in the ruling spoke of two concepts in GST framework — mixed supply or composite supply.Mixed supply is when two products with different tax rates are bundled together. Say, hair oil and comb — where tax rate for oil is 18% while for comb is 12%. If a manufacturer were to combine both and sell it as a combo then tax rate of 18%, or the highest of the two shall apply.However, composite supply under GST talks about certain services that are incidental. Like if one were to take a flight and meals are provided on the flight, the food would be categorised as incidental supply as the main supply for the airline is operating flights. Hence, in this case, GST rate of the principal supply— that is tax on airline services — will apply even on the food provided on the plane.The AAR ruling said in the Kundan Mishtan Bhandar’s case that it is a composite supply and hence the tax rate of the restaurant should apply. The ruling may have created complications not just for the tax department but also for future disputes, say tax experts.“The decision also brings out the inherent difficulties in determining the principal supply and incidental supplies in case of composite supplies made by two distinct establishments housed in the same premises and having the same GST registration number,” said Mani.Tax expert say that the ruling would only benefit bigger players as small players are already out of the GST gamut. Bigger players that typically run a shop and a restaurant in the same premises could now see their profits soar due to the tax arbitrage.The tax ruling also spoke about input tax credit. “The rate of GST shall be 5% as on date on the condition that credit of input tax charged on goods and services used in supplying the said service has not been taken,” the AAR ruling that ET saw, said.Tax experts say that for most shop keepers and sweet mart owners, input tax credit may not be a big problem as most of the ingredients and raw materials they use are already out of the credit mechanism.