The souring effect of GST on sweet treats

Cake symbolises celebration — for any occasion, big or small. With the new Goods and Services Tax (GST) being one of the biggest tax occasions in India’s history, it seems worthwhile to analyse its impact on the baking and confection industry.   

Will we savour bakery products at the same price point as before? Will higher ingredient costs spoil the fun? Let’s take a look.

Have your cake and tax it too

Previously, under VAT, cakes were charged 5 percent tax. Under GST, however, cakes are now charged 18 percent tax, increasing the total cost by more than 10 percent.

Bakeries are already feeling the effect, receiving fewer bulk orders during the recent holiday season. Customers too. If the average cake costs Rs. 500, customers now pay Rs. 90 as GST, compared to Rs. 25 previously.

Not only cakes, but other confectionary items sold at bakeries, such as biscuits and snacks, also now cost more, with 18 percent GST added on top.

How GST may impact cake recipes

The cost of ingredients that go into a cake also affect the cost of the overall cake. So will cake still be as sweet under the GST regime?

Sugar, a key ingredient, now falls in the 5 percent GST bracket. Under the VAT regime, excise duties, VAT, and entry taxes were charged on sugar, adding up to a total tax rate of around 8 percent. Hence, sugar has become sweeter under GST due to a lower tax rate.

Another important ingredient, eggs are taxed at 5 percent GST, which will increase the cost of making cakes in most states. Previously, eggs were only taxed in some states and tax-free in others.

Further, an additional 12 percent GST on strawberries may sour the taste of red strawberry cake, traditionally purchased for special anniversaries in India.

The GST rate for other ingredients, such as vanilla extract, chocolate, and cocoa powder, will be 18 percent, the same average tax rate as under the previous VAT regime.

Restaurant cakes seem all the sweeter

Amidst the increase in prices, bakeries also face stiff competition from restaurants, which sell many of the same snacks and biscuits that bakery owners do but at a lower tax rate. Restaurants charge 5 percent GST while bakeries must charge 18 percent.

According to industry experts, around 40 percent of the food items, such as desserts, starters, and snacks, that restaurants serve are actually bakery items, making the sting of the tax disparity all the worse. 

Confusing classification, tedious tax rates

There is a lot of confusion over the treatment of different food items. Breads are GST-free, but a vada pav sold in a bakery will attract 18 percent GST. Uncooked eggs are GST-free, but cooked eggs will attract 5 percent GST.

While customers can put these tax complications aside while enjoying their cakes and snacks, albeit after paying a little more than they used to, businesses must keep tax matters top of mind at all times. That’s where tax automation software comes in handy. It not only provides the correct tax rate for invoices and purchases, it also helps minimize errors so bakers and other entrepreneurs can worry less about tax matters and focus more on the business at hand. 

Avalara is an experienced application service provider (ASP) and partner of authorized GST Suvidha Providers (GSPs). To understand how our cloud-based application, Avalara India GST, can help you with GSTR-1 to -9, contact us through https://www1.avalara.com/in/en/products/gst-returns-filing.html.