Have you ever noticed that few of the restaurants charges service tax as well as vat while other charges only VAT. Ever wondered why we have been charged with service tax on big restaurant not in smaller ones??
Let me start with clearing concept about applicability of Service Tax on Restaurants:
The Government has announced the following conditions for the levy of Service Tax on a Restaurant:-
- The Restaurant should be Air Conditioned, and
- The Restaurant should have License for Serving Alcohol
If both these conditions are satisfied, Service Tax would be mandatorily levied. However, if any of these conditions is not fulfilled, Service Tax will not be levied.
Note: If you don’t consume Alcohol or the AC was not switched on, Service Tax on Food would still be levied as the Law states that the Restaurant should be air-conditioned and should have license for serving alcohol. These conditions have only been applied to distinguish whether a person is going to a restaurant only for food or for both food + services.
Types of Charges and Taxes levied on the Bill
When you go through any restaurant bill you will find out following types of charges and taxes have been levied:
1. Service Charge:
This is a charge levied by the Restaurant Owners as payment for the Services rendered like serving the food etc. This Charge is not levied by the Govt and is collected by the Restaurant Owners themselves. This charge is optional on the part of the Restaurant and they are free to charge any amount as Service Charge after making proper disclosures in the Menu Card. In other words, Service Charge is a Mandatory Tip to be paid, if proper disclosures for the same are shown in the Menu Card.
Different Restaurants levy different Service Charges although it is normally in the range of 5% to 10%. Some Restaurants levy Service Charge only for dine-in customers and not for Takeaway or Home-Delivery Customers. Levying service Charge is entirely at the sole discretion of the Restaurant Owner and they are free to levy any amount as Service Charge
VAT is Value Added Tax levied on the sale of any item. As food is being sold in a restaurant, VAT is liable to be paid on such sale. VAT is levied by the State Govt and is at the sole discretion of the State Govt. Different States prescribe different rates of VAT. Moreover, even in the same state, different Rates of VAT have been prescribed for different items. The Rate of VAT is different for Alcoholic Beverages and different for other food items.
3. Service Tax:
When you go to a Restaurant, you not only go there to eat food but also avail of various amenities and hospitality services. The Cost of Food as shown in the Menu Card is a composite charge and includes not only charges for the Cost of Raw Material but also for the Cost of the Services rendered. And as these Services are being rendered, the Centre Govt collects Service Tax on the Services rendered.
Although Restaurants nowadays are collecting Service Charges separately, but that is not enough to cover the Cost of Services provided and therefore, a portion of the Cost of Services is also included in the Cost per Dish.
Service Tax on Food Served in Restaurants
The Charges for the Food served in a Restaurant is a composite charge for the food as well as for the Services. As it is a composite charge, Service Tax cannot be levied on the whole amount.
Bifurcation of the Total Bill into 2 parts i.e. Value of Goods Sold and Value of Services Provided is very difficult. Therefore, in case of any Composite Charge, the Govt usually announces an abatement scheme wherein Taxes are not levied on the total amount but only on a certain portion of the total amount.
In order to ensure transparency and standardization in the manner of determination of the value of such service provided in a restaurant or as outdoor catering, Rule 2C was inserted in the Service Tax (Determination of Value Rules).
As per this Rule, abatement has been allowed for the levy of Service Tax on the Food Served in Restaurants, which says that Service Tax should be charged only on 40% of the Food Bill (incl. Service Charge) and not on the Total Bill.
Or in other words only 4.94% Service Tax on Restaurant (i.e. 40% of 12.36%) shall be chargeable. The Computation of Service Tax has been explained below with the help of an example. For the purpose of simplification, VAT has been presumed at 14.50% on the Total Food Bill.
However, in case the food is not being served in a restaurant and is being served as part of outdoor catering, service tax should be levied on 60% of the Total Bill.
Please Note: The Bar Council on 3rd November 2012 issued a notice that Service Tax should only be charged on Service Charge and not on the Food Bill. However, the Additional Commissioner of Service Tax has clarified that the interpretation of the Bar Council is incorrect as the Service Tax Rules very clearly state that Service Tax is also to be charged on 40% of the Food Bill.
VAT on Food Bill
As per the Service Tax Rules, Service Tax on Food served in Restaurants is chargeable on only 40% of the Food Bill as they’ve estimated that out of the Total Food Bill – 40% is for the Services provided and 60% is for the items sold. Now as per this logic, VAT should be charged only on 60% of the Food Bill as Service Tax has already been charged on 40% of the Food Bill.
However, this is not the case. The VAT Laws specifically state that VAT Rate is to be applied on the Total Food Bill (incl. of Service Charge).