Tax implementation in Restaurants on your bills

It was Friday evening; I was sitting in restaurant with family and friends to celebrate my birthday. We had nice four course dinner along with Beverages. Like any intelligent person I ran through a glimpse of the pricing as well.

So roughly I estimated the bill to be around 4000 bucks and I was looking forward for the meal. However, when the bill came, little did I knew that I was not intelligent enough.. The numbers did not matched, also the amount was more than 5000 bucks, as service tax, VAT and service charge were added to raise the bill by 20 to 25% extra in my misery. A part of me though felt cheated but can’t help had to pay the bill.

I was little annoyed but had to pay.

This is very general to all of us, don’t you think? So I thought to find out the basis of these extra charges been levied on my bill.

 Let me explain it here, the rationale behind all this:

There are 3 things majorly added over and above the item cost. These are:

1)     Service Charge

2)      Service Tax

3)     VAT

Let’s elaborate them one by one.

Service Charge:

This is charged by the restaurant for the services rendered to you like Serving the food etc . This money goes to the restaurant. The establishments are free to charge any amount as service charges as there are no guidelines provided by the tax authority. The charge varies from 5 percent to 10 percent. We can say that these charges are in lieu of tips. So, in case if such charges are levied don’t pay tips as the amount is divided among the staff.

Service Tax:

When you are eating in a restaurant, you are not only having food but also availing services of sitting arrangement, air condition etc which is liable for taxes. Service tax is the tax levied by the Government on the services rendered by restaurants. Service tax is same in all states. It is 12.36 percent (and now proposed as 14% from coming financial year) on the 40 percent of the bill. The bill includes your food and drink and the service charge. The restaurant must be air-conditioned for the service tax. So, don’t get confused with terms like service charge and service tax. Also, please note Service tax is not levied on service charge. As it is difficult to generalize the Service Tax separately on each item and not to be mixed it with VAT, It is considered that 40% of food bill is chargeable for Service Tax.

Moreover, Service tax can be charged only in case if restaurant is air conditioned as per govt. norms.

VAT:

 VAT (value added tax) is state specific and charged on sale of goods. The rates can be as low as 5 percent and as high as 20 percent depending upon the states. Moreover, VAT for food items and drink are different. Many restaurants might club food items and drink and charge a flat rate on the total bill. In such cases, it is good to ask for separate bills for food and drinks. This should clearly show the different VAT for both the items.

For example, your total bill amount is Rs. 2,000. Then service charge at the rate of 10% on total food bill will be Rs. 200. Total bill amount will be Rs. 2,200.

VAT will be calculated as; let’s say 12.5% of Rs. 2,200 which is equal to Rs. 275.

So, bill amount is now; Rs 2,475. Now, adding service tax, which is charged at the rate of 12.36% on 40% of food bill (excluding VAT), will be Rs. 108.76. Thus, total amount will be Rs 2,583.76; which can be rounded off to Rs. 2,584.

Another doubt whether service tax is levied on goods sold on MRP basis as part of bill/invoice?

The reply is if the goods sold on MRP basis (fixed under legal metrology Act) they have to be excluded from the total bill to derive at the value of service portion.

One more doubt, services provided in relation to serving of food or beverage by a canteen in factory covered under factories act 1948 having the facility of air conditioned or central air heating?

The clarification is No service tax on serving of food by canteen in factory on both the air conditioned canteen as well as non air conditioned canteen.

So, next time while dining do keep an eye out for inflated bills.

Please feel free to contact Munim Team for any further clarification/help.

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