CA Lalit Munoyat
Restaurant Service has been made taxable to service tax w.e.f. 1st May 2011. This levy is covered by section 65(105)(zzzzv) read with notification No. 1/2006-Service Tax, dated the 1st March, 2006, as amended by Notification No.34/2011 – Service Tax 25th April, 2011. The scope of the service is defined as “services provided to any person, by a restaurant, by whatever name called, having facility of air-conditioning in any part of the establishment, at any time during the financial year, which have license to serve alcoholic beverages, in relation to serving of food or beverages, including alcoholic beverages or both, in its premises.”
In order to be covered within the definition of Restaurant Service as stated above the following conditions shall have to be satisfied in all. These conditions form an integral part of the levy. These are as under:-.
1) The service must be provided by a Restaurant
The word Restaurant has not been defined by the Act. It is generally perceived to be a place where food, drink and dessert are prepared and served to customers in return for money. Meals are generally served and eaten on premises, but many restaurants also offer take-out and food delivery services. Restaurants vary greatly in appearance and offerings, including a wide variety of the main chef’s cuisines and service models.
Modern restaurants are dedicated to the serving of food, where specific dishes are ordered by guests and are prepared to their request. Cooks prepare food items in a more systematic and less artistic fashion. Restaurants caters to different styles of cuisine, price brackets, and religious requirements. Even within a single restaurant much choice is available, and people order the food item from written menus.
Restaurants range from unpretentious lunching or dining places catering to people working nearby, with simple food served in simple settings at low prices, to expensive establishments serving refined food and wines in a formal setting.
Restaurants often specialize in certain types of food or present a certain unifying, and often entertaining, theme. For example, there are seafood restaurants, vegetarian restaurants or ethnic restaurants. Generally speaking, restaurants selling food characteristic of the local culture are simply called restaurants, while restaurants selling food of foreign cultural origin are called accordingly like continental. They are rated as 1 to 3 stars or grade I to Grade III to indicate culinary merit and in general, the more stars/grades awarded, the higher the prices. Restaurants can be classified as under:
(a) Fully served: Typically, customers sit at tables, their orders are taken by a waiter, who brings the food when it is ready, and the customers pay the bill before leaving. In finer restaurants there will be a host or hostess to welcome customers and to seat them.
(b) Self served: One collects food from a counter and pays, then sits down and starts eating
a. one collects ready portions
b. one serves oneself from containers
c. one is served at the counter
2) The restaurant must have the facility of air-conditioning in any part of the establishment.
It is not necessary that the facility of air-conditioning is available round the year. If the facility is available at any time during the financial year the conditions for the levy shall be met. It may either be fully air-conditioned or partly air-conditioned. What is required is that the system of air condition must be present. The actual use of the air conditioning system is not prescribed.
But then what is air conditioning? As is generally understood , air-conditioning means the removal of heat from indoor air for thermal comfort. However, it does not necessarily mean so only. It must be understood in larger terms otherwise it is bound to give perverse meaning. For example, air conditioner in New Delhi is used to cool the room air and maintain the temperature at the desired level. However, in winter, use of air conditioning in a cold place like Srinagar in Kashmir Leh & Laddakh, Manali is just unthinkable. Instead of cooling the air, what is required in those places is “heating” and there are many restaurants which provided centrally air-heated restaurants.
Take another case, In another sense, In very dry climates, air coolers are popularly used or improving comfort during hot weather. An air cooler is a device that draws outside air through a wet pad, such as a large sponge soaked with water and reduce the sensible heat of the incoming air through evaporation of water in the wet cooler pads.
The term air-conditioning thus must be understood in a larger sense as referring to any form of cooling, heating, ventilation, or disinfection that modifies the condition of air. An air conditioner is an appliance, system, or machine designed to stabilise the air temperature and humidity within an area ,used for cooling as well as heating depending on the air properties at a given time.
3) The restaurant must have license to serve alcoholic beverages:
The only requirement for this condition to satisfy is that the restaurant must have license to serve alcoholic beverages. That’s enough. Despite having licence the restaurant may not serve any alcoholic beverages throughout the year. Such types of cases are also included in this levy. It is only the possessive condition that is required to be fulfilled. The user condition is not relevant. All food and beverage sales will be charged to service tax. An alcoholic beverage is a drink containing ethanol, commonly known as alcohol. Alcoholic beverages are divided into three general classes: beers, wines, and spirits. They are legally consumed in most countries, and over 100 countries have laws regulating their production, sale, and consumption.
4) The service must be in relation to serving of food or beverages
What is taxable is the services “in relation to serving of food or beverage, including alcoholic beverages or both”. The tax is on the services and not on the consumption of food or beverage, including alcoholic beverages. These services are as under:
(a) Serving of food or
(b) Serving of beverage or
(c) Serving of alcoholic beverage or
(d) Serving of all of the above.
CBEC has vide Letter No. DOF 334/3/2011-TRU dated 28.2.2011 clarified the scope of this service as under –
(a) Restaurants provide a number of services normally in combination with the meal and/or beverage for a consolidated charge. These services relate to the use of restaurant space and furniture, air-conditioning, well-trained waiters, linen, cutlery and crockery, music, live or otherwise, or a dance floor. The customer also has the benefit of personalized service by indicating his preference for certain ingredients e.g. salt, chilies, onion, garlic or oil. The extent and quality of services available in a restaurant is directly reflected in the margin charged over the direct costs. It is thus not uncommon to notice even packaged products being sold at prices far in excess of the MRP.
(b) In certain restaurants the owners get into revenue-sharing arrangements with another person, who takes the responsibility of preparation of food, with his own materials and ingredients, while the owner takes responsibility for making the space available, its decoration, furniture, cutlery, crockery and music etc. The total bill, which is composite, is shared between the two parties in terms of the contract. Here the consideration for services provided by the restaurants is more clearly demarcated.
(c) Another arrangement is whereby the restaurant separates a certain portion of the bill as service charge. This amount is meant to be shared amongst the staff who attend the customers. Though this amount is exclusively for the services it does not represent the full of value of all services rendered by the restaurants
(d) The new levy is directed at services provided by high-end restaurants that are air conditioned and have license to serve liquor. Such restaurants provide conditions and ambience in a manner that service provided may assume predominance over the food in many situations. It should not be confused with mere sale of food at any eating house, where such services are materially absent or so minimal that it will be difficult to establish that any service in any meaningful way is being provided.
5) These services must be provided in the premises of the restaurants
The primary purpose of a restaurant cannot be the sale and supply of alcohol. In order to be taxable, the service must be provided in the premises of the restaurants and for doing so, the restaurant generally requires On-premises licence. Such licences apply to a variety of purposes including accommodation venues, restaurants, catering services, vessels, tourism businesses, tertiary institutions, and public entertainment venues. Sale of alcohol is permitted for consumption primarily on the premises. The type of business for an on-premises licence is specified when the licence is granted.
6) What is not taxable
(a) 70% of the gross value i.e. the total price charged by the restaurant is exempted vide notification No. 1/2006-ST, dated 1-3-2006 as amended by notification No. 34/2011-ST, dated April 25, 2011. The exemption is available provided no Cenvat credit is availed either of inputs or input services. It is clarified that the exemption is available on the gross price charged by the restaurant for the taxable service, including any portion shown separately e.g. service charge. However the amount paid by the customer ex-gratia e.g. as tip to any member of the staff doesn’t constitute consideration paid to the restaurant and shall remain outside this levy.
(b) Sale of goods at MRP and sale of food at the counter or home delivery services.
(c) VAT charged on the supply of food.
7) Gross price charged : The exemption is available on the gross price charged by the restaurant for the taxable service, including any portion shown separately e.g. service charge. Whether luxury taxes, entertainment taxes or such other local levies should be included in the gross amount charged. In the absence of any clarification one may be inclined to take a clue from the duty on readymade garments where Retail Sale Price has been defined as the maximum price at which the excisable goods in packaged form may be sold to the ultimate consumer and includes all taxes, local or otherwise, freight, transport charges, commission payable to dealers, and all charges towards advertisement, delivery, packing, forwarding and the like, as the case may be, and the price is the sole consideration for such sale. Dissenting views are welcome.
8 ) Open Questions
(a) The levy is service oriented. If there is no service, there must be no service tax. A restaurant is generally perceived to be the one which provide sitting place and is served by a waiter as per his order.
1. But one may visualise a situation wherein an otherwise liable restaurant does not provide sitting place in the restaurant and only buffet meals are served.
2. There are many restaurants which are self served i.e. the guest himself has to pick up his food items. Here the guest is the service receiver as well as service provider. Self service is not regarded as a service and therefore not taxable.
3. What would be the situation when a restaurant flouts the legal norms and serve food or beverage, including alcoholic beverages without obtaining a licence? One generally finds this type of situation where law enforcing authorities are themselves providing patronage to such a restaurant running without a licence. Legality and taxability have no nexus. A smuggler may have good earning from smuggling activity. He is liable to be charged under Indian Penal Code. But he is also liable to the income tax department for payment of income tax on income earned from smuggling activity. Likewise, suppose a restaurant is squarely covered by the levy as it fulfills all the conditions of the levy EXCEPT obtaining a licence. By the definition itself, such a restaurant can’t be brought under this levy.
4. A restaurant is fully covered by the definition EXCEPT that it has not got the required NOC from the competent authorities including the other members of the society for the operation of the A/C system. Will the levy be applicable in such a situation?
5. A restaurant has a Liquor Bar which is fully air conditioned. The other part of the restaurant is not air conditioned. Is it fair to tax a teetotaler(one not consuming liquor) who takes his food in the non air conditioned part of the restaurant. Why should he pay for the sins of the others?
6. If a guest orders food from the garden of a restaurant . The garden is outside the boundaries of the air conditioned restaurant. What will be the status of the levy in such a case. He is not using the services in the premises of the restaurant.
Short term accommodation Service has been defined in clause (zzzzw) of Section 65(105) which reads as any service provided
“to any person by a hotel, inn, guest house, club or campsite, by whatever name called, for providing of accommodation for a continuous period of less than three months.”
The levy proposes to tax service of providing short term accommodation by hotels, inns, guest houses, clubs and others and at camp-sites. This service is proposed to be taxed where the continuous period of stay is less than 3 months and the declared tariff for providing of such accommodation is less than rupees 1000 per day. “Declared Tariff” includes charges for all amenities provided in the unit of accommodation like furniture, air-conditioner, refrigerators etc., but does not include any discount offered on the published charges for such unit.
This levy comes into force on the 1st day of May, 2011.
The scope of this service has been clarified vide D. O. F. No. 334/3/2011-TRU 25th April, 2011 as under:-.
In accordance with the budget announcement, the levy will be applicable on short-term accommodation with a declared tariff of Rs 1000 per day or above. A suitable exemption has been given below this amount vide notification No. 31/2011-ST dated April 25, 2011. Declared tariff has been defined within the notification as charges for all amenities provided in the unit of accommodation. Thus it will include cost of all electronic gadgets installed in the room and any other facility normally provided by a hotel as part of the stay. Cost of extra bed will not form a part of the declared tariff. No further exclusions are provided from the declared tariff e.g. on account of breakfast or any other meal whose cost is included in the declared tariff including any discount given to the customer. However an exemption @ 50% has been given by amending the notification No.1/2006-ST dated 01.03.2006 vide notification No. 34/2011-ST dated April 25, 2011 provided no Cenvat credit is availed either of inputs or input services. The actual levy is restricted to accommodation with declared tariff of Rs. 1,000 per day or higher Once this requirement is met, tax will be chargeable irrespective of the fact that actually the amount charged from a particular customer is less than Rs. 1,000. The tax will also be charged on the gross amount paid or payable for the value of the service.
In many hotels various types of rooms are provided starting with single occupancy room to a luxury suit. The tariff depends upon the type of room provided. A single occupancy room rent may be less than Rs. 1000/- while the room rent of luxury suit may be in excess of Rs. 5000/- per day. In such a case the levy shall apply to the luxury suit only as the tariff exceed Rs. 1000/- per day. Any discount given from out of published tariff shall be ignored and service tax shall be levied and the full rate and not the discounted or negotiated tariff.
Since the tariff is fixed on per day basis, it is important to know what does a day mean. In hotels ,inns etc. the period means “period from check-in to check-out time”. If this time is say, 10 Am, then a guest checking in at 7 AM and checking out at 3 PM same day, will be charged for two days even though he has not stayed for a full day of 24 hours. Once the requirement of Rs. 1000/- or more is met, tax will be chargeable irrespective of the fact that actually the amount charged from a particular customer is less than Rs 1,000. The tax will also be charged on the gross amount paid or payable for the value of the service. One can make his own guess as to what does a period means. Well in the above stated case , even a period of 8 hours constituted 2 days.
Moreover, since the levy is attracted only in case of a continuous period of less than three months, any continuous stay of more than 3 months is not taxable under this class.
Since the levy of service tax on hotel accommodation and restaurants is a new one all affected accommodations provider must get themselves registered within 30 days of the beginning of the levy. The last date for registration is 30th May 2011.
CA Lalit Munoyat
B.Com.(Hons.), CS., FCA, DISA