Court Bites Service Tax on AC Restaurants

Dr. Sanjiv Agarwal

Service Tax is applicable on sale or supply of food stuff in air-conditioned restaurants whether or not part of any hotel. Even the eating joints in air-conditioned malls and eateries like Pizza Hut, Mc Donald’s, Coffee Cafe day etc are also liable to Service Tax on supply of food in their premises as all of these are air-conditioned. W.e.f. April 2013, such restaurants suffer Service Tax even if they do not have a license to sell alcoholic beverages which was a pre-condition prior to April, 2013.

Under Service Tax Law, service portion in an activity wherein goods, being food or any other article of human consumption or any drink, whether or not intoxicating, is supplied in any manner is a taxable service on which Service Tax is payable. However, supply of foods or drink is also a deemed sale in our Constitution on which sales tax or value added tax (VAT) is payable. Such an activity cannot be treated as a service and Service Tax levied thereon. But the Government levied Service Tax on such activities claiming that it is only taxing the service component of the supply of food or drinks and thus levied a Service Tax on 40 percent of the food supply bill of an air conditioned restaurant.

Kerala High Court has last week (on 3^rd July, 2013) struck down the said levy as unconstitutional and hence invalid holding it to be beyond the legislative competence of Parliament. The court observed that the every purpose of incorporating the definition of tax on sale or purchase of goods in India’s Constitution was to empower the State Governments to impose tax on the supply, whether it was by way of or as part of any service of goods either being food or any other article for human consumption or any drink. The Constitution permits sale of goods during service as taxable and if there is any service, it forms part of sale of goods. As such, the State Governments alone have the legislative competence to enact a law imposing a tax on service component of sale of food or drinks. Not only this, the court said that the service providers were entitled to seek refund of the amount of Service Tax so paid. The high court also struck down the levy of Service Tax on accommodation services provided by hotels in the same order.

Thus, this judgment should bring cheers to the entire hotel and restaurant industry, which is already facing the brunt of recession and economic slowdown. Also, hotel and restaurant goers would be happy. While the Government may go into appeal to apex court, it may not so happen soon. Hotels and restaurants would certainly welcome this move which will provide them a sigh of relief.