Eating at air-conditioned restaurants became more expensive last week with the budget proposing a service tax on them. Until now, a service tax of 12.36% was applicable on 40% of the bill at air-conditioned restaurants having a licence to serve alcoholic beverages. However, now the service tax will be applicable even at establishments that don't have a liquor permit.
The new levy could make it harder for people to decipher their bills, which are already quite complicated, given the multiple charges. These include service taxes, service charges, cesses and value added tax (VAT). A further complication is that these charges are levied differently on various food and beverage items, leaving plenty of scope for errors and misunderstandings.
This gets so complex that sometimes even the restaurants get this stuff wrong. For instance, Trader Vic's Mai-tai, a restaurant in Mumbai's High Street Phoenix mall, used to levy 20% VAT on tea until recently. Dharmesh Panchal, executive director, indirect taxes, PricewaterhouseCoopers Pvt. Ltd, pointed out: "VAT on tea is levied below 12.50% of the price of the tea and not 20%. Only products such as alcohol, tobacco or fuel attract VAT in excess of 12.50%."
The company that runs Trader Vic's said the levy was a mistake and had been corrected.
Here's a look at some of the charges on a restaurant bill. While this is based on Mumbai restaurant bills, most of these apply on a national scale as well.
This sees the embedding of gratuities in the bill. The levy is usually 5-10%, although there is no minimum or maximum. The restaurant can decide the rate as per a February 28, 2011 circular issued by the ministry of finance (http://tinyurl.com/6qt72am). The amount raised is meant to be shared among the staff.
This varies from 4.80% to 4.95% on the total value of the meal plus the service charge, if that's included in the bill and covers all restaurants that are air-conditioned. For instance, Sea Lounge at the Taj Mahal Palace in Mumbai doesn't levy a service charge. All restaurants don't necessarily show the service tax on the bill.
"We include service tax in the food that we serve and pay the tax to the government," said Suhas Awchat, managing director, Goa Portuguesa Restaurant Pvt. Ltd. "All places that serve alcohol have to pay service tax to the government. While it is necessary to show applicable service tax separately on invoices, some restaurants may not show service tax separately on the invoice but nevertheless, they would be liable to pay service tax."
This is usually levied at 5-20% but only on certain items. It also varies from state to state. VAT is levied on the bill and is also applicable to the service charge.
To see how this works, take a bill for four. Assume the meal and drinks come up to Rs 5,000 and the service charge to Rs 500. At an average 12.5% in Mumbai, VAT comes to Rs 687.50. With service tax amounting to Rs 272.25 (4.95% of Rs 5,500), the total bill comes to Rs 6,459.75.
A selected class of restaurants in some states can avail of a composition scheme under the head of government tax. This means small businesses with up to Rs 50 lakh in sales don't have to provide detailed tax records, allowing for a simpler method of accounting for VAT.
For instance, in Maharashtra, some restaurants can pay VAT at the rate of 5% (in case of registered dealers) and 10% (in case of unregistered dealers). Such restaurants cannot claim credit of VAT paid on inputs. For instance, Woodside Inn at Colaba in Mumbai levies government tax. This comes to 10% of the total bill amount on alcohol. This bifurcation will be done only if there is no service tax or VAT mentioned in the bill.
Education cess, education secondary and higher secondary (S&HS) cess: These levies account for a 29.19% price escalation. Apart from this, restaurants that levy service tax below 4.95% are obliged to levy two education-related cesses.
If service tax is levied at 4.80% on food and beverage, the restaurant levies an education cess of 2% and an education S&HS cess of 1% on the total bill, according to Sachin Menon, partner, head, indirect tax, KPMG.
Besides this, it's always a good idea to read the fine print anyway. That's how Rohan Kotwal, a commerce student in south Mumbai, who frequents the 'Pizza By The Bay' restaurant, got to know he was being a philanthropist every time he ate there. It was his friend who actually showed him the item on the bill- Rs 5 for charity. "I am okay with charity but the restaurant should ask me whether I am willing to do it," Kotwal said.
To be sure, the bill does mention the contribution and that it's entirely voluntary.
"The contribution is purely voluntary and is clearly mentioned in our bill folders," said Kingsley Mendes, manager of 'Pizza By The Bay', in an email.