Dining out can be an expensive and tricky proposition. The pricey cuisine topped with taxes and service charge can often leave customers with a bad taste. Consumers often feel fleeced and resort to litigation. It is being widely debated whether service charge is a valid levy or not. It is in this backdrop that Hindustan Times Haryana bureau chief Hitender Rao attempts to deconstruct your restaurant bill, taking a closer look at the levies, their origin and legality.
Which levies does a customer pay while dining at a restaurant?
Value added tax (VAT) on food and liquor, service tax and service charge.
What is the difference between VAT, service tax and service charge?
VAT is a sales tax levied and collected by the respective state governments. In Chandigarh, Punjab and Haryana, the VAT on the supply of food is 12.5 %. The rate of VAT levied on alcoholic drinks is different. VAT is charged on the entire amount of food and drinks, including service charge.
Owing to Supreme Court judgments disallowing the levy of sales tax on food and drinks served in a hotel or a restaurant, the central government in March 1981 brought 46th amendment to the Constitution to include in Article 366 a definition of tax on sale or purchase of goods by inserting clause 29 (A). The idea was to check avoidance of tax as it was felt that due to SC rulings the state governments were losing revenue on sale of food and drinks in a hotel or restaurant. The inserted clause 29 (A)(f) which provides tax on the sale or purchase of goods, includes a tax on the supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration.
What is service tax?
It is a tax levied by the central government charged at 14% of 40% of the total amount. Therefore, the effective service tax rate would be 5.6% (14% of 40%) of the total amount charged as service tax on the food bill plus service charge.
Service tax on air-conditioned restaurants having licence to serve liquor was introduced in 2011. However in 2013, its scope was widened and all air-conditioned restaurants not having liquor licence were brought under the service tax regime.
What is service charge?
Service charge is levied by the restaurant or hotel for distribution among the staff members. It doesn’t have any statutory backing but the government has nowhere disallowed it. The restaurant collecting the service charge has to pay tax to the government. It is the discretion of the restaurant to fix the percentage of service charge though normally it is 5-10%.
The critical point here is that all restaurants should mention the rate of service charge on their menu card and at a prominent place on their premises.
In October 2014, the excise and taxation commissioner, Chandigarh administration, issued an order prohibiting the collection of service charge on the grounds that it does not have a statutory backing. When the order was challenged in the Punjab and Haryana high court, the UT excise and taxation department withdrew the order and issued another one. The fresh order of February 2015 asked eatery owners to show cause as to why the service charge collected by them from the consumers be not included in the gross turnover, taxed and penalised accordingly as per provisions of the Punjab VAT Act. The HC consequently disposed of the petition as it had been rendered infructuous but clarified that the administration, if statutorily permitted, may examine the question of levying of service charge by eateries.