Every time you go and dine out in a restaurant, the food bill turns out to be more than expected. And then when you go through the Bill in detail to cross check the charges levied, you realise that there are a whole lot of charges and taxes which have been levied on the food bill. Many people also raised concerns regarding the manner of levy of Service Tax on Food served in Restaurants by circulating mails and expressing their concern on Social Networking Platforms.
We conducted an extensive research the Service Tax Laws on the manner of charging Service Tax on Food so as to ensure that the Restaurant Owners are not overcharging Service Tax and this is what we found.
(In case you are not sure clear regarding the concept of service tax, please refer our article on What is Service Tax)
Charges and Taxes on Food served in Restaurants
When you dine out at a restaurant, the following charges and taxes are normally levied on your food bill:-
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.
2. VAT: 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.
Applicability of Service Tax on Food in Restaurants
We don’t always go in a restaurant for both Food + Services. Many a times, people go in a small nearby restaurant not for the services provided but only for the food. In such cases, Service Tax won’t be leviable.
To distinguish between whether a customer is going to a restaurant only for the Food or for both Food + Services, the Govt has announced the following conditions for the levy of Service Tax in a Restaurant:-
- The Restaurant should be Air Conditioned,
Earlier the Conditions were that the Restaurant should be Air Conditioned + Restaurant should have license to serve liqour. However, in the Budget 2013, P. Chidambaram removed the 2nd condition and now Service Tax would be levied on all Restaurants which are air conditioned.
In Budget 2013, P.Chidambaram also announced that Service Tax would also be levied on under-construction property where area of the property is more than 2000 sq ft.
- Recommended Read: Service Tax on under-construction property
Some people have confused Service Tax on Restaurants with Service Tax on under-construction property and think that Service Tax on Restaurants is levied only when the Restaurant is air-conditioned and is more than 2000 sq ft. However, this interpretation is completely wrong and Service Tax is levied on all air-conditioned restaurants.
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 standardisation 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 5.6% Service Tax on Restaurant (i.e. 40% of 14%) 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.
The Finance Ministry has also issued a circular on levy of service tax in some special circumstances. (Refer: Circular No 173/8/2013)
Earlier, there was a confusion regarding whether Service Tax should be levied only on Food served in an AC Restaurant or should Service Tax also be levied on Home Delivery of Food. However, it has now been clarified in a written communication that Service Tax is not applicable on Home Delivery of Food.
In case of Home Delivery of Food, the dominant nature of the transaction is that of Sale of Goods and not providing of Service and therefore Service Tax would not be applicable in case of Home Delivery of Food.
- Recommended Read: Service Tax on Home Delivery of Food – Not applicable
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).
Please Note: Service Tax Laws are framed by the Central Govt and VAT Laws are framed by the State Govt
The above article on Service Tax on Food served in Restaurants has been authored by Karan Batra