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Dr. Sanjiv Agarwal

April 1, 2013 has brought a new levy of tax in the form of service tax on all restaurants who serve food and beverages to customers in their restaurants.

Prior to April 1, service tax was levied on food and beverages including liquor which were served in restaurants having facility of air-conditioning or central heating system and a licence to serve liquor. The condition to have a bar permit or licence has been done away w.e.f. 1st  April, 2013 which implies that all such places having air-conditioning shall be liable to service tax and as such, charge service tax to their customers in food/ drink bills. What is illogical is that even if only a part of such restaurant is air -conditioned or even when it provides air-conditioning for a part of the year, it would be subjected to service tax. However, restaurants which are in open air or garden or on terrace where no air-conditioning is available should not be charging service tax. Customers should be aware of this condition or else they end up paying more.

There could be an argument that food is a sale and not a service. Yes, that may be true but what Government has stipulated that it is not the whole of food bill which will be taxed to service tax but only service portion of food sale. For this purpose, service tax will be levied only 40 percent of the total bill assuming that 60 percent goes in the cost of food sold. Thus, effectively service tax will be levied @ 12.36 percent only on the 40 percent of the food bill, i.e., effective tax rate of service tax will be 4.94% of the total bill. Customers should note this and question any illegal levy of service tax. In some case, service tax is charged at full rate (12.36%) on 100 percent of food bill which should be objected to. Some restaurants charge a ‘service charge’ which is not a service tax but a charge for services provided to customers. What is taxable is serving of food in a restaurant. As such any sale of food at MRP (say a water bottle or soft drink) will be considered as a sale and not a service. Similarly ‘free home delivery’ and ‘take away’ billings are not leviable to service tax. Also, service tax cannot be charged on the amount of VAT.

Certain eating joints and air-conditioned canteens which are operated in air-conditioned malls or airports or other commercial spaces will also be covered in service tax from April, 2013. Thus, while eating out in restaurant would cost more, it also leads to a typical case of double taxation as one ends up paying VAT on full food bill and service tax on 40 percent of the bill which goes against the tax policy.

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0 Comments

  1. K K SARAOGI says:

    As no service charge is charged in AC restaurants for food and VAT is applicable on entire amount, levy of service tax would further increase outgo from the pocket of customer when these restaurants already charge exorbitant amount.

  2. djolly says:

    Hi, We had office party in courtyard marriot and they charged full 12.36% service tax. As per above explanation I understand it was incorrect or have I understood it wrong?

  3. gangaram chandwani says:

    SINCE CENTRAL GOVERNMENT Has declared that 40% of food bill in an AC restaurant is service component and the 40% portion cannot be charged to VAT. Only 60% portion be subject to VAT . 40% PORTION CANNOT BE SIMULTENIUOSLY CHARGABLE TO SERVICE TAX VAT . State governments do have right to protest and get service tax removed on such activities which were chargeable to VAT fully.

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