Dr. Sanjiv Agarwal

1st May, 2011  has brought  cheers for some services  and a fresh dose of taxes on consumption of services for others.

Effective May 1, 2011, service tax @ 5 percent shall be levied on all hotel rooms where the tariff of hotel rooms is @ Rs 1000 per day or more so much so that hotel rooms will become costlier by 5 percent. The rate of tax is 10 percent but 50 percent abetment has been provided which makes the effective rate of tax to 5 percent. Service tax would not be payable by hotels where room tariff is less than Rs 1000 a day. In hotels where rooms are provided with different tariffs, say a set of rooms having tariff of less than Rs 1000 and another set of rooms with tariff of more than Rs 1000, service tax will be attached on rooms with higher tariff only. For the purpose of service tax, declared tariff (published rates) shall be considered and not the  discounted or negotiated tariff. It would cover all charges payable for amenities such as air conditioner, furniture, refrigerator etc and any electronic gadgets installed in the room(eg, internet connection).  However, cost of extra bed will not be taxed. Also, if cost of meals is included in tariff, it will be taxable but rooms service charges may not be taxed.

In case of restaurant services, which is also taxable w.e.f. 1st May 2011, air conditioned restaurants having licence to service alcoholic beverages are covered. These restaurants may or may not be serving liquor but holding a licence to serve will make them liable to service tax. Once they are liable, all food and beverage sale will be charged  to service tax. The tax will be charged on the gross amount of restaurant bill including service charges or surcharge , if any. What amounts are not taxable would included, sale tax or VAT levied on food sale, home delivery or packing charges, and goods sold at MRP ( like mineral water, drinks or juices) and amount paid by customers as ex gratia  (tips) to staff of restaurant. The tax incidence in this case will, however get reduced as an exemption would be available to the extent of 70% of the bill amount to defray the cost of food sold and cost of services involved on a lump sum basis. Thus, if a restaurant bill is for Rs 2000, service tax @ 10% percent would be levied on Rs 600 only, being 30 percent of bill which will come to just Rs 60.

The levy of service tax on hotel accommodation and restaurants is a new one. All such units will have to get themselves registered with service tax department latest by 30th May 2011.

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June 2021