Have you ever wondered where that delicious pizza you ordered last night came from? Chances are, it was cooked up in a cloud kitchen. These virtual restaurants have been popping up everywhere, offering a convenient and cost-effective way for entrepreneurs to launch their food businesses.
But here's the twist: Cloud kitchens must follow the rules of traditional restaurants. That means complying with tax regulations, including the Goods and Services Tax (GST).
Whether you're a budding foodpreneur or already running a cloud kitchen, understanding GST is essential. Let's get started and explore GST for cloud kitchens!
What is GST registration?
GST registration involves obtaining a unique identification number (GSTIN) for a business liable to pay Goods and Services Tax (GST).
In India, firms with an annual turnover exceeding a certain threshold (usually Rs. 40 lakhs or Rs. 20 lakhs for specific categories of states) are required to register for GST.
Now that we know what GST registration is, let’s explore why it’s crucial for cloud kitchens.
Why GST Matters for Cloud Kitchens
GST, or Goods and Services Tax, is crucial in running a cloud kitchen's financial and operational aspects.
While cloud kitchens offer a low-overhead, delivery-focused business model, they are still subject to the same tax regulations as traditional restaurants.
GST is a comprehensive indirect tax in India. It applies to the supply of goods and services. For cloud kitchens, GST compliance is not merely a legal obligation. It significantly impacts pricing strategies, profitability, and market competitiveness. Proper GST handling ensures legal adherence. It also enables you to leverage potential tax benefits.
Also, if you are an entrepreneur looking to partner with a well-known, quickly growing cloud kitchen company, you are welcome to browse our franchise opportunities on the Kouzina website. Begin your adventure right now!
Next, we’ll get into the fundamental details of GST registration for your cloud kitchen.
The Basics of GST Registration for Cloud Kitchens
Cloud kitchens must comply with India’s Goods and Services Tax (GST) regulations like any other business.
Understanding the eligibility for GST registration is crucial for cloud kitchen owners to ensure proper tax compliance.
Here’s when and why cloud kitchens need to register for GST:
1. Annual Turnover Threshold
The primary eligibility criterion for GST registration is the annual turnover of your cloud kitchen business. The specific limits are:
For most Indian States, Cloud kitchens must register for GST if their annual turnover exceeds INR 20 lakhs.
For Special Category States: In states like the North eastern regions and hilly states (e.g., Arunachal Pradesh, Sikkim, Assam, etc.), the threshold for GST registration is INR 10 lakhs.
If your cloud kitchen operates across multiple states or plans to scale operations, registering under GST becomes mandatory once these turnover limits are crossed.
2. Voluntary GST Registration
Even if your turnover is below the mandatory threshold, you can opt for voluntary GST registration. This offers several benefits for your cloud kitchen.
Access to Input Tax Credit (ITC): Voluntary registration allows you to claim ITC. This means you can offset the GST paid on your raw materials, packaging, and other business expenses against your output GST liability. This significantly reduces your overall tax burden.
Enhanced Credibility: A GSTIN (GST Identification Number) adds credibility to your business. It signals professionalism and compliance to your customers and suppliers.
Business Expansion: Many B2B clients and food aggregators prefer to work with GST-registered businesses. Voluntary registration facilitates partnerships and future growth opportunities.
Inter-State Supply: If you plan to supply food to customers in other states, GST registration becomes mandatory regardless of your turnover.
Cloud kitchen firms like Kouzina do not have dine-in facilities. Their entire concentration is on cooking meals for delivery services like Swiggy.
3. Compulsory Registration in Special Cases
Even if your turnover is below the threshold, GST registration is compulsory in exceptional cases such as:
Input Service Distributor (ISD): If you distribute input tax credits to multiple branches of your cloud kitchen.
Casual Taxable Person: If you operate a temporary or seasonal cloud kitchen.
Non-Resident Taxable Person: If you are a foreign entity operating a cloud kitchen in India.
Inter-state supply of goods or services: If you sell food across state borders, registration is mandatory.
Reverse Charge Mechanism (RCM): If your cloud kitchen is involved in transactions where RCM applies (e.g., purchasing certain services from unregistered suppliers), you must register.
E-commerce operators: If your cloud kitchen sells through an e-commerce platform that is required to collect TCS (Tax Collected at Source), you might need registration. However, specific rules apply to food aggregators, as discussed later.
Here’s a quick look at the step-by-step process of registering your cloud kitchen for GST.
Step-by-Step GST Registration Process
You can complete the GST for the cloud kitchen registration process online through the official GST portal. Follow these steps:
Step 1: Access the GST Portal.
Visit the official GST portal (www.gst.gov.in) and click the "Services" tab.
Step 2: Fill in Part A of the Registration Form (GST REG-01).
Enter your basic details, including your PAN, mobile number, and email ID. Once submitted, you'll receive an OTP for verification.
Step 3: Complete Part B of the Form.
After verification, fill in your business details, including the name of your cloud kitchen, address, bank account details, and business structure (proprietorship, partnership, etc.).
Step 4: Upload Required Documents
Upload the necessary documents such as:
Proof of business address (rental agreement, utility bills)
PAN card of the business owner
Identity & address proof of the business owner
Bank account details (canceled cheque, bank statement)
Step 5: Verification
After submitting the form, the GST officials will verify your application. Once approved, you'll receive your GST registration certificate, which includes your unique GST Identification Number (GSTIN).
Before registering, make sure you have all the necessary documents in hand.
Documents Required for GST Registration
The GST for the cloud kitchen registration process in India is relatively simple. Cloud kitchens can register for GST online through the GST portal. The documents below are required for GST registration:
PAN Card: The Permanent Account Number (PAN) card is a unique identification number issued to individuals and businesses in India.
Aadhaar Card: The Aadhaar card is a 12-digit unique identification number issued by the Indian government to residents.
Business Registration Documents: Depending on the business structure, this could include a partnership deed, company incorporation certificate, or other relevant documents.
Bank Account Details: The business bank account details are required for financial transactions related to GST.
Proof of Business Address: Documents such as a rental agreement, property tax receipt, or electricity bill can be used to verify the business address.
Digital Signature: A digital signature is a cryptographic technique used to authenticate electronic documents. It is often required for online GST registration.
Now, let's explore the GST tax structure for cloud kitchens and how it impacts your business.
GST Tax Implications for Cloud Kitchens
The tax structure for cloud kitchens largely mirrors that of traditional restaurants. However, recent changes concerning food aggregators have streamlined compliance.
Applicable GST Rates
Cloud kitchens providing "restaurant services" are generally subject to a 5% GST rate without Input Tax Credit (ITC).
Restaurant Service Definition: This includes the supply of food or any other article for human consumption or any drink (excluding alcoholic liquor for human consumption), whether for consumption on or away from the premises.
This definition explicitly covers takeaway and door delivery services, thus including cloud kitchens.
Without Input Tax Credit (ITC): Under this 5% rate, cloud kitchens cannot claim Input Tax Credit (ITC) on the GST paid for their inputs (such as raw materials, packaging, and kitchen rentals). This is a crucial point to remember for your cost calculations.
Supply Through E-commerce Operators (Swiggy, Zomato, etc.)
A significant change in GST regulations, effective from January 1, 2022, impacts cloud kitchens selling through food aggregators:
Aggregator's Liability: E-commerce operators (ECOs), such as Swiggy and Zomato, are now responsible for collecting and remitting the 5% GST on restaurant services supplied through their platforms.
Simplified Compliance for Cloud Kitchens (for aggregator orders): This means that for orders received through these platforms, the cloud kitchen does not need to collect or pay GST on those specific sales. The ECO handles it.
Your Direct Sales: If your cloud kitchen also takes direct orders (e.g., via your website/app or walk-ins for takeaway), you are still liable to collect and pay 5% GST on those sales, provided your turnover exceeds the threshold.
For these direct sales, you would issue a Bill of Supply (if under the composition scheme) or a Tax Invoice (if under the regular scheme and claiming ITC on certain non-food items).
Apart from GST, cloud kitchens must also consider direct tax implications:
Income Tax: Profits from your cloud kitchen are taxable as business income under the Income Tax Act, 1961. The applicable rate depends on your business entity type (sole proprietorship, partnership, or company).
TDS (Tax Deducted at Source): Cloud kitchens might need to deduct TDS on certain payments made to vendors or service providers. Examples include rent payments exceeding a certain annual threshold or professional fees. You must deposit TDS promptly and file TDS returns.
If you’re a smaller operator, the Composition Scheme might be worth considering. Let’s explore it.
The Composition Scheme for Cloud Kitchens
The Composition Scheme offers a simpler GST compliance option for small taxpayers.
Eligibility Criteria
A cloud kitchen can opt for the Composition Scheme if:
Its aggregate turnover in the preceding financial year did not exceed ₹1.5 crore (or ₹75 lakh for special category states).
It is engaged in the supply of food or any other article for human consumption or drink (i.e., restaurant services).
It does not supply non-GST goods (like alcoholic liquor for human consumption).
It does not make inter-state outward supplies.
It does not supply goods through an e-commerce operator who is required to collect TCS (although this rule has evolved with the change in aggregator liability for restaurant services).
It does not collect tax from customers.
Benefits of the Composition Scheme
Lower Tax Rate: For restaurant services, the Composition Scheme rate is 5% of the turnover (2.5% CGST + 2.5% SGST).
Simplified Compliance:
No detailed invoices are required; you issue a "Bill of Supply."
You file quarterly statements (Form CMP-08) and an annual return (Form GSTR-4) instead of monthly returns.
Less detailed record-keeping is needed.
Reduced Compliance Burden: This scheme simplifies tax calculations and filing, freeing up time and resources.
Disadvantages of the Composition Scheme
No Input Tax Credit (ITC): This is the most significant drawback. You cannot claim ITC on any purchases made, which means the GST paid on your raw materials, packaging, and other expenses becomes a cost to your business.
No Inter-State Sales: You cannot make inter-state outward supplies.
Cannot Collect Tax from Customers: You pay tax out of your pocket and cannot charge it separately to your customers. Your bill of supply must clearly state "composition taxable person, not eligible to collect tax on supplies."
Limited Business Scope: The scheme imposes restrictions on specific types of supplies and business activities.
Deciding Between the Composition Scheme and the Regular Scheme
The choice depends on your cloud kitchen's specific circumstances:
Low Turnover & Local Operations: If your turnover is consistently below the ₹1.5 crore threshold, and you primarily serve local customers, the Composition Scheme offers simplicity. However, carefully analyze the impact of losing ITC.
High Input Costs & Potential ITC: If your cloud kitchen has significant GST-paid input costs (e.g., high-value equipment, expensive ingredients where suppliers are GST-registered), opting for the regular scheme, even at a higher nominal GST rate (if applicable for other services), might be more beneficial due to ITC availability.
However, for "restaurant services" (which includes most cloud kitchens), the standard rate without ITC is 5%.
If you sell packaged or branded food items separately, these may attract a GST rate of 12% or 18% with ITC eligibility.
ITC can significantly reduce your tax burden, here’s how it works for cloud kitchens.
Input Tax Credit (ITC) for Cloud Kitchens
ITC allows businesses to reduce their GST liability by claiming credit for taxes paid on inputs.
ITC Eligibility Under 5% GST Rate
As noted, cloud kitchens paying 5% GST on "restaurant services" are generally NOT eligible for ITC on inputs like:
Raw materials and ingredients
Packaging materials
Kitchen rentals and utilities (if GST is applicable)
Marketing or advertising services
This means the GST paid on these expenses becomes a direct cost.
Join Kouzina's expanding cloud kitchen network to take advantage of data-driven marketing techniques that will elevate your company's profile in the meal delivery sector.
Exceptions and Nuances for ITC
Packaged/Branded Food Items: If your cloud kitchen sells separately packaged or branded food items (excluding those included in a cooked meal), these may be subject to a higher GST rate (12% or 18%).
For such sales, you may be eligible for input tax credit (ITC) on the inputs specific to those items. You would need to maintain separate records.
Other Services: If your cloud kitchen provides any other services (e.g., consultancy, facility rental) that attract a different GST rate and are eligible for ITC, you need to apportion your ITC appropriately. This is less common for pure cloud kitchen models.
ITC on Commission from Aggregators: While food aggregators collect GST on restaurant services, they also charge a commission to the cloud kitchen, usually attracting 18% GST.
You CAN claim ITC on the 18% GST paid on these commission charges from Swiggy/Zomato, provided you are a GST-registered entity. This is an important point for reducing your overall operational costs.
Once registered, maintaining compliance is key. Let’s see what you need to do.
Compliance Requirements for Cloud Kitchens Under GST
Once registered, compliance is an ongoing responsibility.
GST Return Filing
GSTR-1: This return details your outward supplies (sales). It can be filed monthly or quarterly, depending on your turnover. Even if your sales are entirely through aggregators (who collect GST), you still need to report direct sales here.
GSTR-3B: This is a monthly summary return for declaring your tax liability and claiming ITC (if any). You must file this diligently.
GSTR-9 (Annual Return): This is an annual consolidation of all monthly or quarterly returns filed during the financial year.
CMP-08 (for Composition Scheme): Quarterly statement for paying tax.
GSTR-4 (for Composition Scheme): Annual return for composition dealers.
Issuing Invoices
Tax Invoice: If you are a regular taxpayer and making taxable supplies (e.g., packaged goods where ITC is allowed, or direct sales if not covered by aggregator RCM), you must issue a tax invoice.
Bill of Supply: If you are a composition dealer or supplying exempt goods/services, you issue a bill of supply. For cloud kitchens, this is common for direct sales of restaurant services under the 5% scheme.
HSN/SAC Codes: Ensure that the correct HSN (Harmonized System of Nomenclature) or SAC (Services Accounting Code) codes are mentioned on your invoices.
GSTIN: Your GSTIN must be prominently displayed on all invoices.
E-invoicing and E-way Bills
E-invoicing: For businesses with an aggregate turnover exceeding a specified threshold (currently ₹5 crore), e-invoicing is mandatory. This involves generating invoices on the GST portal.
E-way Bill: An e-way bill is required for the movement of goods exceeding a certain value (currently ₹50,000) from one place to another. While direct food delivery to customers typically doesn't require an e-way bill, bulk deliveries to other business premises might.
This helps in smooth GST return filing and audits.
Now, let's consider some challenges cloud kitchens may face under GST regulations.
Common GST Mistakes Cloud Kitchens Make
Avoiding these pitfalls is crucial for compliance.
Incorrect Classification: Misclassifying restaurant services (5% without ITC) with other supplies (e.g., packaged food with 12%/18% GST with ITC) can lead to discrepancies.
Ignoring Turnover Thresholds: Failing to register for GST once the turnover crosses the threshold can result in penalties and interest.
Confusion with Aggregator Liability: Cloud kitchens sometimes incorrectly include aggregator-borne GST in their GSTR-3B, leading to reconciliation issues. Remember, aggregators handle GST for orders on their platform.
Improper ITC Claims: Attempting to claim ITC when operating under the 5% GST rate (without ITC) for restaurant services. Only claim ITC on eligible inputs, such as the commission paid to aggregators, or for specific taxable goods/services that allow ITC.
Late Filing of Returns: Missing GST return deadlines incurs late fees and penalties.
Inaccurate Invoicing: Errors in GSTIN, HSN/SAC codes, or tax rates on invoices can lead to compliance issues.
Not Reconciling Data: Failing to reconcile your sales data from aggregators with your books can cause mismatches.
Lack of Knowledge on Composition Scheme: Not fully understanding the pros and cons of the Composition Scheme before opting for it can lead to financial disadvantages.
Conclusion
Cloud kitchens in India are required to register for GST if their annual turnover exceeds Rupees. 20 lakhs. The applicable GST rates for cloud kitchens depend on the nature of the goods or services provided.
While the 18% GST rate for cloud kitchens may seem high, it’s necessary for running a legitimate business in the food industry.
Cloud kitchens are required to file GST returns monthly and maintain accurate records of income, expenses, and liabilities.
Entrepreneurs who want to join a well-established cloud kitchen business can invest between Rs. 10-15 lakh in Kouzina, which has been successful as a multi-brand model.
Kouzina is an excellent choice for anyone looking to start or expand in the food sector. They can help you start a cloud kitchen by offering low-cost franchisees and company management assistance. This could be your opportunity to flourish in India's thriving meal delivery sector.
Get in Touch Now!
Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.
