Welcome to another Friday, chief.

In today’s edition — Tax authorities target the textile industry for misclassifying services to dodge taxes; Mad Over Donuts faces a GST dispute, which could also impact the broader food industry.

The Do’s & Donuts of GST

—Vishwas Ved

It seems the taste buds of taxmen are delectably unpredictable. A few months ago, they preferred popcorn—plain or caramelised, we don’t know. Now, it’s donuts. Which is why Singapore-based brand Mad Over Donuts (MOD) has found itself miles away from a sweet spot, fighting a ₹100-crore tax demand over whether donuts are a restaurant service or just… donuts. Also, we hear that tax officers have a new crush: the textile industry that has been accused of washing and dyeing their books. 

Let’s look at them one by one:

Whither Sweet Spot?

There’s a new tax question in town: Should a sweet donut be taxed like a bakery item at 18%, or should it fall under restaurant services and attract only a 5% GST?

Mad Over Donuts is in the Bombay High Court fighting a ₹100-crore tax notice over this very issue. The GST department argues that donuts are bakery products and should be taxed accordingly. 

MOD, on the other hand, argues that when a customer buys a donut at their outlet—whether dining in or taking away—it should be treated as a restaurant service, which attracts a lower 5% tax rate.

MOD’s lawyer has argued that the supply of donuts is a “composite supply” of goods and services—just like how a meal at a restaurant is taxed as a service rather than as individual ingredients.

If the Bombay High Court rules in MOD’s favour, it could lower tax burdens for restaurants and takeaway chains. But if the ruling goes the other way, donut shops across India might find themselves paying a lot more in GST.

The case could set a precedent for how various food items are classified under GST. Because if a donut is a bakery item, what about burgers, sandwiches and samosas? Let’s just wait for the court ruling on March 24.

Until then, if you find yourself debating whether a donut is a service or a product over your morning coffee, just grab a bagel instead.

Fabricated Books?

For months now, taxmen have been investigating a few textile manufacturers who, they believe, have been misclassifying their activities and underpaying their taxes. 

According to news reports, some companies have been accused of reporting processes that transform fabric—like bleaching or printing—as mere ‘washing and dyeing’. 

If you’re wondering why taxmen are being fussy about the processing techniques, here is the answer: the rules say that washed and dyed fabric is taxed at 5%, while transformative processes attract an 18% rate. 

The gap is big, no doubt, and according to an official estimate, this alleged misclassification has led to a shortfall of hundreds of crores in tax revenue.

While the GST law on fabrics seems pretty unambiguous, there’s still some confusion around tax slabs. The 45th GST Council meeting, chaired by Finance Minister Nirmala Sitharaman in September 2021, sought to fix this by discussing a proposal to raise the tax rate on dyeing and printing services to 12%. 

But that proposal was canned though the debate over an accurate classification is still on. Hence, the scope for subjectivity in tax calculations.

CGST officials are now scanning through business accounts to determine who should have been paying more. Whether this investigation turns into a tax windfall for the government or is just relegated to being a regulatory headache for the textile industry remains to be seen.

PAN-tastic Troubles

Imagine being the “owner” of a company called Bhagya Laxmi Enterprise, but fortune does not favour you at all. If you think it’s just an irony, wait till you hear the whole story.

Janapati Venkateswarlu, an illiterate daily labourer living in a tin shed in Telangana, was told by taxmen earlier this month that he owns a company by that name, and he owes ₹22.86 lakh in unpaid GST dues, including tax, penalty, and interest, for FY 2022-23.

Venkateswarlu, who earns a living through manual labour, first realised something was off the day he applied for a PAN card. He was told he already had one. And then came the letter from the tax department, stating that Bhagya Laxmi Enterprise had been racking up tax dues under his name. The case is now under investigation.

Although Bhagya Laxmi may not have blessed Venkateswarlu, he is hoping authorities sort out his case before he gets a follow-up notice.

He has more options, such as filing police complaints and suing for damages, but you cannot expect an illiterate labourer to navigate a bureaucratic maze designed only for experts. Meanwhile, fraudsters keep pulling off these stunts because getting a fake business registered is easier than getting an actual tax refund.

According to tax experts, this is a classic case of identity theft where scammers misuse PAN and Aadhaar of other people to open bogus businesses and commit fraud, leaving unsuspecting individuals to deal with the mess.

So, if you smell something fishy or get some suspicious text messages involving your PAN or Aadhaar, visit the GST portal. And if you discover that your PAN has gone entrepreneurial without informing you first, make sure you report it.

₹16,350,000,000,000

₹16.35 trillion—the worth of non-performing assets that banks in the country have written off in the past 10 financial years, the Parliament was informed this week.The highest amount of ₹2,36,265 crore was written off during financial year 2018-19 while NPAs worth ₹58,786 crore were written off in 2014-15, the lowest during the period. During 2023-24, the banks wrote off bad loans of ₹1,7 lakh crore, lower than ₹2.16 lakh crore done in the previous financial year.

— Big B Tax. Amitabh Bachchan has set a new record by becoming India’s highest-tax-paying celebrity for the financial year 2024-25, surpassing actor Shah Rukh Khan. The 81-year-old actor earned ₹350 crore this year, resulting in a tax liability of ₹120 crore- a 69% increase from last year's ₹71 crore. Amitabh Bachchan’s income comes from several sources, including films, brand endorsements, and the long-running game show Kaun Banega Crorepati, which he has hosted for over two decades.

— Tax Settlement. Taxpayers can now settle offences by paying a fine, announced the Central Board of Direct Taxes (CBDT). But, this applies only if the taxpayer has no links to anti-national or terrorist activities. The CBDT has announced that all tax-related offences, including those investigated by the Enforcement Directorate and the Central Bureau of Investigation, can now be resolved by paying a fine, a process known as the ‘compounding of offences’. However, if any taxpayer is found involved in anti-national or terrorist activities, their case can only be settled with the approval of the CBDT chairman.

— Largest Acquisition. Google on March 18 signed its largest-ever acquisition deal to buy an Israeli cybersecurity firm, Wiz, for $32 billion. The company aims to use Wiz's services to protect its entire cloud business from foreign threats and fuel rapid growth using its resources and products. Wiz's products will continue to work and will be available across all major cloud systems, including Amazon Web Services, Microsoft Azure, and Oracle Cloud, even after the acquisition is completed.

— Gripe about Grok. The government is engaging with Elon Musk-owned X over several incidents of its AI chatbot, Grok, using Hindi slang and abusive language while giving responses to users. The Information and Technology Ministry has expressed concerns with X over the use of such provocative language and will look into the factors leading to it. Developed by xAI, an artificial intelligence company founded by tech titan Elon Musk in 2023, Grok was designed as an alternative to mainstream AI models like ChatGPT and Google's Gemini.

ICYMI: Room Service With a Side of Tax Confusion

Missed last week's update? The hotel industry has urged the government to amend the confusing GST charged on food at hotel restaurants based on the room rate.

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