The Tax Department submitted that many “hookah bars” predominantly supply hookah services alongside ancillary food items, yet discharge GST at a concessional rate of 5 per cent by classifying the entire activity as a “restaurant service.”
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While an AAR ruling is legally binding only for the applicant and the specific tax jurisdiction involved, it is often relied upon in similar cases and frequently serves as a foundation for broader policy decisions.
“In the case of tobacco-based hookah, the supply will be treated as a supply of goods and taxed at 20 per cent CGST + 20 per cent SGST. For non-tobacco-based hookah (using dried tea leaves, mint leaves, or rose petals, as stated by the applicant), the supply will also be treated as a supply of goods and taxed at 9 per cent CGST + 9 per cent SGST,” the AAR stated while disposing of an application by Indian Wire Products Company, which operates the ‘Pappu Chaiwala’ restaurant chain.
The chain’s Kolkata-based outlet proposed serving both herbal and tobacco-based hookah to customers on its premises as part of the dining experience. It sought an advance ruling on whether serving hookah alongside food constitutes a supply of goods or services under Clause 6(b) of Schedule II of the CGST Act. Furthermore, it sought clarity on the applicable tax rates for both herbal and tobacco-based flavors.
During the hearing, the Tax Department submitted that many “hookah bars” predominantly supply hookah services alongside ancillary food items, yet discharge GST at a concessional rate of 5 per cent by classifying the entire activity as a “restaurant service.”
“The jurisdictional authority is of the opinion that such practices require strict scrutiny, as the principal supply in these establishments is not food or beverages, but a variety of hookah flavours,” the department argued.
separate taxes
The department further noted that prices charged to customers range from approximately ₹550 to ₹1,200 per session, depending on the duration and the restaurant’s category. This price point, they argued, indicates that the dominant element of the transaction is the hookah rather than the food.
After reviewing the facts, the WBAAR concluded that when a restaurant serves hookah alongside food, it constitutes two separate composite supplies: food and tobacco (or non-tobacco) products for smoking. Consequently, both must be taxed separately.
According to Manoj Mishra, Partner at Grant Thornton Bharat, this ruling creates an immediate classification reset for operators who built pricing models around the lower 5 per cent rate.
“The exposure could be significant. For outlets where hookah sessions are priced between ₹800 and ₹1,500 and form a steady revenue stream, the differential tax impact over several years may translate into sizable demands, including interest and potential penalties,” Mishra said. “Beyond the immediate numbers, the ruling sharpens the interpretation of ‘composite supply’ under GST and signals a more rigorous approach to bundled offerings. Businesses will need to reassess historical positions, provisioning strategies, and contract structures with urgency,” he added.
Published on March 4, 2026