The decision came in the case of Indian Wire Products Company, which operates a restaurant called Pappu Chaiwala and serves hookah along with food or non-alcoholic beverages, but not on a standalone basis.
AAR draws distinction between food and hookah
The West Bengal AAR ruled that serving food in a restaurant falls within Clause 6(b) of Schedule II of the CGST Act, which treats restaurant service as a composite supply of service. However, hookah, whether tobacco-based or non-tobacco, cannot be classified within the same bracket.
Highlighting the fundamental difference between the two, the authority observed that food and beverages provide nutrients to the human body, whereas smoking hookah triggers pleasure and sensation and may lead to addiction.
“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 authority noted.
The AAR further clarified that the phrase “any other article for human consumption” under Clause 6(b) of Schedule II refers to edible substances such as water, condiments, spices, and other accompaniments served with meals. Since smoke does not qualify as an edible substance, tobacco or herbal hookah cannot be included in restaurant service.
Different GST rates to apply
Based on its interpretation, the authority held that restaurants serving hookah along with food will need to apply different GST rates for each supply:
Restaurant service (food): 5% GST
Tobacco-based hookah: 40% GST (HSN 2403)
Non-tobacco hookah using products such as dried tea leaves, mint leaves, or dried rose petals: 18% GST
The ruling stated that supply of hookah in a restaurant constitutes a composite supply of goods, where the principal supply is tobacco or non-tobacco products provided for smoking, along with services such as preparation and serving of the hookah apparatus.
According to the authority, when restaurants offer hookah along with food, two separate composite supplies arise — one relating to restaurant service and another relating to smoking products.
“When a restaurant serves tobacco or non-tobacco based hookah in the restaurant along with food, there occurs two separate composite supplies,” the AAR said in its order dated February 27, 2026.
Industry impact and tax exposure
Tax experts say the ruling could significantly impact restaurants and lounges that have been treating hookah as part of restaurant services and applying the concessional GST rate.
Manoj Mishra, Partner and Tax Controversy Management Leader at Grant Thornton Bharat, said the decision could trigger a major classification shift for the sector.
“Across the industry, many restaurants offering hookah have been treating it as a composite restaurant supply and applying the concessional 5% GST rate. 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,” Mishra said.
He added that the financial exposure could be significant for establishments where hookah contributes a steady stream of revenue.
“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, along with interest and potential penalty,” Mishra said.
According to him, beyond the immediate tax implications, the ruling sharpens the interpretation of composite supply under GST and signals a stricter approach to bundled offerings.
“Businesses will need to reassess historical positions, provisioning strategies and contract structures with urgency,” he added.
Key takeaway from the ruling
The AAR concluded that tobacco or non-tobacco hookah supplied in a restaurant cannot be treated as part of restaurant service simply because it is offered along with food or beverages. Instead, it constitutes a separate taxable supply of goods.
The ruling was delivered by Shafeeq S. (Member – Central Tax) and Jaydip Kumar Chakrabarti (Member – State Tax), in response to an application filed by Indian Wire Products Company, represented by counsel Rajarshi Dasgupta.
The decision is expected to be closely watched by restaurants, lounges, and tax professionals, as it clarifies the GST treatment of hookah services and underscores the importance of proper classification under the indirect tax regime.
