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The CBEC has provided clarifications vide Circular No. 173/8/2013-ST., Dated: October 7, 2013 on various doubts and questions raised pertaining to Restaurant Services, which is reproduced here in below:

Doubt 1.  In a complex where air conditioned as well as non-air conditioned restaurants are operational but food is sourced from the common kitchen, will service tax arise in the non-air conditioned restaurant?

Clarification – Services provided in relation to serving of food or beverages by a restaurant, eating joint or mess, having the facility of air conditioning or central air heating in any part of the establishment, at any time during the year (hereinafter referred as ‘specified restaurant’) attracts service tax. In a complex, if there is more than one restaurant, which are clearly demarcated and separately named but food is sourced from a common kitchen, only the service provided in the specified restaurant is liable to service tax and service provided in a non air-conditioned or non centrally air- heated restaurant will not be liable to service tax. In such cases, service provided in the non air-conditioned / non-centrally air-heated restaurant will be treated as exempted service and credit entitlement will be as per the Cenvat Credit Rules.

Doubt 2.  In a hotel, if services are provided by a specified restaurant in other areas e.g. swimming pool or an open area attached to the restaurant, will service tax arise?

Clarification – Yes. Services provided by specified restaurant in other areas of the hotel are liable to service tax.

Doubt 3.   Whether service tax is leviable on goods sold on MRP basis across the counter as part of the Bill/invoice.

Clarification – If goods are sold on MRP basis (fixed under the Legal Metrology Act) they have to be excluded from total amount for the determination of value of service portion.

Background of Service tax implication on AC Restaurants Services vides the Finance Bill, 2013:

With effect from July 1, 2012, Service is defined under Section 65B(44) of Chapter V of the Finance Act, 1994 (“the Finance Act”) means  any activity carried out by a person for another person for a consideration is service, which includes a declared service. Further service tax is applicable unless said service falls under the negative list of services or otherwise exempted specifically.

In terms of Clause (i) of Section 66E, service portion in an activity wherein goods, being food or other articles of human consumption or any drink is supplied in any manner as a part of the activity is a declared service.  Thus it implies that service provided by restaurant or caterer is a declared service chargeable to service tax.

Further, the Government vide S. No. 19 of Mega Notification No. 25/2012-ST dated June 20, 2012 (“Notification 25/2012”) granted exemption from payment of service tax to restaurants, eating joints or a mess providing service in relation to food or beverages, other than those having:

(i) facility of air-conditioning or central air-heating in any part of the establishment, at any time during the year, and

(ii) a license to serve alcoholic beverages.

Thus all AC restaurants having license to serve liquor were exigible to service tax.

However post Union Budget 2013-14, the Central Government vide Notification No. 03/2013-ST dated March 1, 2013 (“Notification 03/2013”) which has come into effect from April 1, 2013 has amended S. No. 19 of Notification 25/2012, and deleted point (ii) thereof.

It means that the exemption from service tax to restaurants, eating joints, mess etc. will be available only when such restaurant doesn’t have the facility of air conditioning or central air heating in any part of the establishment, at any time during the year.

Resultantly, now, all air-conditioned restaurants including eating joints or mess etc., will come under the service tax net irrespective of fact whether they serve alcoholic beverages or not.

Open Issues – Need attention of the CBEC for more clarification:

  • Even all AC Restaurants charging service tax on Self-service or Pick up or home delivery – Whether Service tax applicable on Self-service or Pick up or home delivery?
  • Presently, it is debated why double taxation applicable of VAT and Service Tax on AC Restaurant Services.
  • Recently, levy of Service Tax on AC Bar Restaurants Service Under Section 65(105)(zzzzv) of the Finance Act, 1994 held Unconstitutional by the Honourable Kerala High Court in matter of the Kerala Classified Hotels and Resorts Association vide WP (C) 14045 of 2011 that the aforesaid levy by the Centre transgress upon  the subject matter falling under State List -Entry 54 of the List II of the Seventh Schedule of the Constitution and therefore beyond the legislative competence of the Parliament. – Constitutional validity under Litigation – Needs clarity

Hope the Board will provide much needed clarification on open issues mentioned above.

Bimal Jain
FCA, FCS, LLB, B.Com (Hons)
Mobile: +91 9810604563

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  1. Manoj Agarwal says:

    As per clarification, say, if there is a huge Non-AC Mess (restaurant) which also contain one special AC cabin anywhere in the restaurant, then the service tax shall be levied on the entire billing of such restaurant (including food served in Non-AC Mess!!! But, consider a situation, that the entire restaurant is Non-AC but the owners have an AC Office within the restaurant!!!! Then What?? Kindly give your opinion. Thanks to our FM for creation such a mess of our food…

    Regarding clarification on Doubt 3 (MRP products), I had raised this issue few months back and had in fact emailed to Shri V.K. Garg, Jt. Secretary, Tax Research Unit, CBEC. According to constitutional provisions, which is reflected in section 66D (negative list), ‘TRADING OF GOODS’ is not leviable to service tax. Actually, it is not a ‘service’ as defined u/s 65B(44). Whether MRP or Non-MRP goods, if someone is buying and selling the same (at profit or otherwise) without any processing, there shall not be any service tax on the same.

  2. jay says:

    CBEC always adds more confusion and leaves more loose ends which can be interprted by them to their advantage. There is absolutely no value addition in the above clarification. The issues are still open & unanswered

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