Understanding Service Tax at Restaurants

repost bttn suprsd Understanding Service Tax at Restaurants

More often than once that the restaurant bill that comes across turns out to be more than you had expected, there are number of taxes and service charges which may be puzzling.

So what do we do?
Stop going to restaurants?
Well that’s not what can quite happen, right?

Hence we made a conscious effort of digging into the nuances of various taxes so that we know where exactly is our money going.

To begin with let’s first understand what the various tax related terminologies stand for.  Service charge and service tax are two most commonly used terms which are very different from each other.  Service charge is the charge levied on the services provided apart from the basic charge of the food. The service charge is not levied by govt. but collected by the restaurants themselves. When we go to a restaurant we do not just have food but we also avail services of the waitress and kitchen staff. Hence the service charges.  Although there is no fixed amount for the service charge many restaurants charge it in the range of 5% to 10%. Service charges are mandatory to be paid if proper disclosures are made on the menu card otherwise it is the choice of customer.

Now coming to service tax it is the tax levied by the Govt. of India on services provided in India. Many service providers collect this tax from its customers and give it back to government. This is fixed by the central govt. In case of restaurants they collect the tax from its customers for the service provided.

The next question is how is the service tax applied on the food served at restaurants?

It is not always that we visit a restaurant for the service, sometimes it’s only for the food. To distinguish this situation of availing service or food the Govt. has laid down certain rules for the application of the service tax. First rule is that only air conditioned restaurants need to pay service tax. Earlier for the service tax to be applicable the restaurant needed to be AC and serve liquor however in budget 2013 Honorable Finance Minister Mr. Chidambaram announced that service tax is applicable to all the restaurants with AC even though they are not serving liquor.

The charge what is applied on the food we are served at restaurants consists of both food and service charges hence the service tax cannot be applied on the entire food charge. But it is difficult to distinguish what amount is for food and what is for service.

Hence to make this bifurcation Govt. has made a rule where the service tax is applicable on the 40% of the food bill at restaurants.  Currently service tax is 12.36%.  This is applicable on the 40% on the food bill.  Therefore is ‘X’ is the bill amount 12.36% (40% (X)) is the service tax and the next effective service tax is 4.95% (X) at the rate of 4.95%.

VAT is another thing to be known about.  VAT – Value Added Tax is applicable to any item being sold.  At a restaurant food is being sold hence VAT is applicable.  VAT is levied by the state govt. Different state Governments have different rates for VAT. VAT also differs for alcoholic beverages and food items.

You must be thinking that VAT is for the items sold then it must be for 60% of the food bill as the other 40% is for service.  However according to the VAT rule it is specified that VAT rate is applicable on the entire amount of the food bill.

Here is an example that will help you understand, Consider your total food bill is Rs. 1000/- 

Total Food Bill

Rs. 1000/-

Service charge (10% of food bill)

Rs. 100/-

Total

Rs. 1100/-

VAT @ 14.5%

Rs. 159.50/-

Total Amount before service tax

Rs. 1259.50/-

Service Tax Rate

12.36%

Portion on which service tax is applicable

40%

Net effective rate of service tax

4.94%

Amount on which service tax is to be paid

Rs. 1100/-

Amount of service tax (4.94% of Rs. 1100/-)

Rs. 54.34/-

Total Bill amount to be paid by customer

Rs. 1313.84/-

 Hope this helps you to understand and make sure next time you dine at a restaurant you are not overcharged or your bill is misrepresented.

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