Bombay High Court to Decide GST Classification for Donuts and Cakes

GST Showdown: Are Donut Chains Like MOD Running Restaurants or Just Retail Counters?

A tax dispute brewing in the Bombay High Court could redefine how popular food chains are taxed under India’s GST regime. At the centre of the debate is Mad Over Donuts (MOD), and the key question is whether its stores function as restaurants—which attract 5% GST—or as retail outlets selling baked goods, which are taxed at 18%.

What Triggered the Dispute?

MOD is facing a substantial GST demand of around ₹100 crore after the Directorate General of GST Intelligence (DGGI) accused it of misclassifying its operations. According to the tax department, MOD primarily sells pre-prepared bakery items—like donuts and cakes—making it a retailer rather than a restaurant.

MOD, however, has pushed back. It maintains that its stores assemble, heat, or finish food on-site, offer dine-in and takeaway options, and should therefore be taxed like restaurants under GST Schedule II, which attracts a lower 5% rate.

The Government’s Position

The DGGI argues that MOD’s stores are not engaged in meaningful cooking or food preparation at the customer location. Instead, officials say the outlets operate more like bakeries or retail counters, where ready-made goods are sold to walk-in customers with minimal service or customisation.

This, they argue, falls squarely within the 18% GST bracket reserved for the supply of baked goods rather than services provided by restaurants.

What the Court Has Said So Far

Recognising the complexity of the issue, the Bombay High Court has temporarily barred the tax department from taking coercive steps against MOD. In its interim order, the court noted that the issue wasn’t black and white—especially in cases where stores offer dine-in and takeaway, and where at least some food is prepared or finished on the premises.

The next hearing is scheduled for March 24, 2025. In the meantime, the DGGI has been asked to respond by March 17.

Why the Case Matters

The implications of this case extend well beyond just one brand. Several major food chains—including Dunkin’ Donuts, Krispy Kreme, and Theobroma—operate under similar models and are reportedly under the tax department’s scanner for the same issue.

If MOD wins, it could pave the way for similar chains to benefit from the lower 5% GST rate, significantly reducing their tax liability.

If the department prevails, even minor in-store prep may not be enough to qualify as a restaurant. Chains would have to rework pricing, supply chains, and tax planning under a potentially higher tax burden.

The Legal Tussle: Goods or Service?

MOD’s Argument (5% GST): The transaction is a composite supply of service where food may be finished or assembled on-site, served to customers, with elements of hospitality. Therefore, it should qualify as a restaurant service.
DGGI’s Stand (18% GST): The core offering is a tangible product—donuts, cakes, muffins—prepared elsewhere and sold off-the-shelf with limited service. That makes it a supply of goods, taxable at a higher rate.

What Comes Next

The High Court’s final ruling will be closely watched by food and beverage businesses across the country. At stake is not just tax categorisation, but the very way hybrid models—blending retail and service—are treated under GST.

For now, MOD and others like it are protected from recovery proceedings. But once the judgment comes, it could recalibrate how fast-food, café, and bakery chains structure their operations and classify their offerings—potentially shifting pricing, compliance costs, and tax planning strategies for the entire sector