Taxes for the Service..

By Saloni Roy,  Smritikona Dutta Aniruddha Chowdhury, Deloitte Touche Tohmatsu India Pvt. Ltd.

A bill could include levies like service tax, VAT and a service charge

Eating out and the various taxes that you have to pay..

The hotel menu says the cost of a plate of chicken fried rice is Rs. 500, but the bill you get is much more than that. The bill for a meal at a restaurant can be rather puzzling.

As a consumer would expect to pay the amount as specified in the menu.

However, the bill includes various additional elements, which often the consumer fails to understand.

Typically, along with the meal charges, a bill could include levies such as service tax, value added tax (VAT) and often, though not always, a service charge.

 

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Tax for the service

The levy of service tax on services provided by restaurants, in relation to serving of food and beverages within the said premises, was imposed for the first time in May 2011 and was restricted to just air-conditioned restaurants serving alcohol at that time. With the introduction of the negative list regime in July 2012, the ambit of service tax was extended beyond restaurants to include even eating joints and messes.

There was no distinction made while levying service tax between premium restaurants & eating joints with self-service.

The service tax net was then further widened with effect from April 2013 to include all air-conditioned restaurants, even if these did not possess a licence to serve alcohol.

Service tax is now applicable at 40 % of the total invoice value excluding VAT. The resultant effective rate of service tax due to such abatement is 4.9 44% of the total invoice or /  bill amount.

This imposition & thereafter widening of the service tax ambit was met with opposition from most restaurateurs & consumers alike since the tax would now be imposed on establishments merely offering a basic facility of air-conditioning.

Value added tax..

Another tax included in your restaurant bill is VAT.  Ideally, VAT should be charged on food items and beverages separately as per their respective rates. VAT rates on food & beverages usually range between 5 % and 20 % and varies from state to state.

Accordingly, this adds to the various heads under which tax is being charged in a bill.

Some restaurants club the price of food items and beverages & charge VAT at a flat rate on the consolidated amount, which could be at a rate higher than that applicable on individual items.

In such cases, it is preferable that restaurant bills clearly and separately demarcate food and beverage items and charge VAT as per the respective rates.

It is also important to consider whether VAT should be additionally charged on the purchase of packaged commodities such as bottled water and wafers by a restaurant, as these are already priced at maximum retail price (MRP) and are inclusive of all taxes.

Service charge, not tax..

Another addition to the bill amount, which is sometimes confused with a tax, is the levy of service charge. This is not a tax.

At best, it is a charge that is applied towards services provided in a restaurant and is usually 5% to10%. Service charges are included in the bill for the purpose of calculating service tax.

Here’s your bill!

The typical manner in which an air-conditioned restaurant raises your bill, is illustrated in the graphic (Your total bill). Thus, when you place an order from the menu expecting a bill of about  Rs.800 for food and beverages as mentioned on the menu, you actually would pay not only for the cost of what you have consumed but also VAT, service tax and service charge components which inflates the bill to Rs.1,056.

Clarifications on service tax

The widening of the ambit of service tax levy also brought forth certain lingering issues, which have been clarified by the finance ministry.

It has been clarified that where a complex has many air-conditioned (A/C) and non-air conditioned restaurants, albeit sourcing food from a common kitchen, service tax would only be levied on services provided by the air-conditioned restaurants.

However, such restaurants need to be clearly demarcated and separately named.

Further, service provided by a restaurant of a hotel in areas like swimming pools or / other attached open areas shall also be liable to service tax.

In addition to this, serving of food and / or beverages by restaurants by way of room service is exempt from service tax.

However, applicability of service tax on restaurants with takeaway / home-delivery facilities is still uncertain.

Service tax is also applicable with the introduction of the negative list on food which is supplied for consideration by canteens maintained in a factory or an office. However, air-conditioned canteens serving food or beverages in a factory covered under the Factories Act, 1948 have been recently exempted from service tax.

About the authors

Mr. Saloni Roy is senior director, and Smritikona Dutta is manager at Deloitte Touche Tohmatsu India Pvt. Ltd.

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