NEW DELHI: The West Bengal Authority for Advance Ruling (AAR) has ruled that hookah served in restaurants along with food will no longer attract the concessional 5% GST rate applicable to restaurant services. This effectively increases the tax incidence on such supplies to 18% in the case of non-tobacco variants and 40% plus applicable compensation cess in the case of tobacco-based products.
In its February 27 order in the case of Indian Wire Products Company, which operates the restaurant ‘Pappu Chaiwala’, the two-member bench held that serving hookah alongside food does not qualify as part of restaurant service. Instead, it must be treated as a separate composite supply of goods, taxable at the rate applicable to the underlying product used for smoking.
The applicant had argued that herbal (non-tobacco) and tobacco-based hookah, when served as part of the overall dining experience, formed a composite supply of restaurant service taxable at 5%. Rejecting this contention, the AAR said the expression “food or any other article for human consumption” must be interpreted in the context of items that are ingested and digested. Hookah smoke, whether tobacco-based or herbal, is inhaled into the respiratory tract and cannot be equated with food or drink.
“Even if we stretch our imagination to the farthest point, we cannot put food, drink and smoking hookah within the same bracket even when they are served in the same restaurant and on the same table,” the bench observed, applying the principle of ejusdem generis.
The authority further held that while hookah service involves both goods (tobacco or non-tobacco products) and service elements (preparation of the apparatus and provision of ambience), the principal supply is the product used for smoking. Accordingly, it constitutes a composite supply of goods under Section 2(30) read with Section 8 of the CGST Act and cannot be subsumed under restaurant service.
The ruling clarified that when a restaurant serves food and hookah together, two separate supplies arise — food, taxable at 5% as restaurant service, and hookah, taxable at the rate applicable to the goods involved. Tobacco-based hookah will attract 40% GST (20% CGST + 20% SGST) along with applicable cess, while non-tobacco variants such as those using dried tea leaves, mint leaves or rose petals will be taxed at 18% (9% CGST + 9% SGST).
Commenting on the ruling, Manoj Mishra, Partner and Tax Controversy Management Leader at Grant Thornton Bharat, said the decision fundamentally disrupts the prevailing industry practice. “Across the industry, many restaurants offering hookah have been treating it as a composite restaurant supply and applying the concessional 5% GST rate," he said.
"The West Bengal AAR ruling fundamentally disrupts that position by holding that hookah is a separate supply of goods, taxable at 18% in case of non-tobacco variants and 40% plus applicable cess in case of tobacco products. This creates an immediate classification reset for operators who have built pricing models around the lower rate,” he said.
Mishra added that the financial exposure could be significant, particularly for outlets where hookah sessions are priced between Rs 800 and Rs 1,500 and form a steady revenue stream. The differential tax impact over several years may translate into sizable demands, along with interest and potential penalties. Beyond the immediate tax outgo, he noted, the ruling sharpens the interpretation of composite supply under GST and signals a more rigorous approach to bundled offerings, requiring businesses to urgently reassess historical positions, provisioning strategies and contract structures.