You’ve just had a nice meal at the trendy new restaurant that everyone’s been talking about. The menu seems reasonably priced till the bill comes, and the figures are enough to give you indigestion. For, just government taxes and the restaurant’s service charge can constitute 30-40% of the food and liquor cost.
There have also been instances of restaurants computing taxes wrongly. A restaurant bill, will typically contain a service tax charge and state specific value-added taxes (VAT). In addition, increasingly restaurants are also levying a service charge. TOI analyzed a few bills to find out how much diners are forking out and why.
Who can charge service-tax? Since 2013, all restaurants which have air-conditioning or central air heating (even if partial) are required to levy and collect service tax. If a restaurant has both an A/C and non-A/C section, merely by sitting in the non-A/C section, you cannot escape service tax. However, typically, the cost of the meal is higher in the air-conditioned section.
HOT TIP: The Central Board of Excise & Customs (CBEC) has provided a leeway only where several restaurants are housed in a large complex, such as a hotel or shopping mall. If a non-A/C restaurant in such a complex is clearly demarcated and has a separate branding and billing, then even if the food is served from a common kitchen, customers of this non-A/C restaurant do not have to pay service tax. Remember this when you stop by at the non-A/C coffee shop in a mall.
How is service tax calculated? The restaurant bill comprises of the meal cost plus services (such as the waiter service, the general ambience by way of air-conditioning, live band et al). The cost of such services is built into the price of the meal. As it is difficult to segregate between meal costs and service costs, the government provides for a 60% abatement. Only 40% of your bill attracts service tax, which at the current rate of 14% works out to an effective rate of 5.6%.
However, Service tax can be levied on 40% of your food bill
HOT TIP: Remember service tax cannot be charged on the full bill amount, it has to be charged on the balance 40%, after abatement. TOI had earlier reported an interesting order of the district consumer court. Uma Parameshwari, who had dined at a Dhaba Express outlet in Anna Nagar, Chennai, in December 2012, found to her dismay that the restaurant had levied service tax on the full bill amount (without the abatement) – thus she had to pay nearly Rs 72 extra. She fought back and was awarded Rs 12,000 by the consumer court.
CAUTION POINT: Service charges can add to the amount of service tax you will cough up. This is because service tax is calculated both on the total food and liquor charges plus the service charge.
VAT and why: Service tax is a central levy, whereas VAT is a state-specific tax on food and drinks, with each state specifying its own rate. The rates may also differ from item to item. In some states, VAT may be lower in a non-five star hotel. For instance, VAT rate on liquor served in a five-star hotel in Maharashtra is substantially higher. If you find the VAT component missing, don’t dance on the table. “If a restaurant opts for the composition scheme they are not allowed to collect the VAT separately. This is paid from their own pocket (or rather factored into the basic pricing of the meal). The rate under composition scheme also varies from state to state; in Maharashtra it is 5%,” explains Sunil Gabhawalla, a chartered accountant and an indirect tax expert.
Also, if the restaurant has levied a service charge, your VAT payout will increase, as VAT is computed on the meal or liquor cost plus the service charge.
What is a service charge? Service charge is not a government levy. Some restaurants levy it and it’s the equivalent of a mandatory tip. More often than not, restaurants do not specifically mention upfront that they are levying a service charge – you notice it only when you get the bill. The service charge typically varies between 5-10% of the bill amount.
CAUTION POINT: Both VAT and service tax is calculated on the total figure (which is food and liquor plus service charge). Hence, a service charge can inflate your tax bill (See table). On the other hand, restaurants do stand to benefit as the higher tax collected by them enables them to claim higher input credit. “Restaurants generally take premises on rent. They pay service tax on rentals, against which they can claim input credit,” says Gabhawalla.