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Here's what those taxes on your restaurant bill mean

Last updated on: November 12, 2013 14:03 IST

Here's what those taxes on your restaurant bill mean

Alok Patnia

Just so that you don't pay extra!

Have you ever gone through the bill in detail when you make the payment in restaurants? If you have, you will probably agree that there are a lot of charges and taxes which are levied.

So that you don't end up making excess payment here's help to decipher your hotel bill.

You will find the following charges levied on your bill amount:

  • Service charge
  • VAT
  • Service tax

Now what is service charge?

In a restaurant you are provided services like being served food at your table. So, the restaurant owner collects a payment for the services rendered. This is not levied by the government. You are required to make this payment if the same is indicated in your bill.

The service charge is at the discretion of the owner and it is generally in the range of 5 per cent to 10 per cent. You can say that it is a sort of mandatory tip which you are required to pay!

Now, as you know VAT is charged on sale of goods. So, in a restaurant is there any sale of goods? Obviously yes! You are being sold food items, don't you agree? So there is a levy of VAT in restaurants.

Now, coming to service tax, there are a lot of amenities and hospitality services in a restaurant. Now the amount that is billed to you is not just cost of food items but also a cost of services. It is a composite charge. Logically, if services are rendered, the Central Government collects service tax on the services rendered.

As per a recent amendment, service tax is charged if the restaurants are air conditioned. So, if the restaurants are not air conditioned no service tax is charged!

Earlier there was a requirement that apart from being air conditioned the restaurants should also have a bar, but this condition has been done away with. Consequently, even if there is no bar, service tax is chargeable if the restaurant is air conditioned.

Now let us understand on what amount is service tax levied.

Well, as we have just seen the bill amount is a composite charge for food items and services, so it would be wrong to charge service tax on the whole amount. However, bifurcation of the bill into the sale and service part is almost impossible. So, what the government has done is allowed abatement.

As a result, service tax is charged on only 40 per cent of the bill amount (including service charge but excluding VAT).

In other words, 4.944 per cent service tax (12.36 per cent of 40 per cent of total food bill) on restaurant is chargeable.

Lets understand this with the help of a hypothetical example:

Total food bill: Rs 2,000

Service charge (at the rate of 10 per cent on total food bill): Rs 200

Total: Rs 2,200

VAT @ 14.5 per cent on Rs 2,200: Rs 319

Total amount: Rs 2,519

Service tax: (12.36 per cent of 40 per cent of 2200): Rs 108.77

Total amount: Rs 2,627.77

To conclude, there is an element of sale and service in case of restaurants. As a consequence, both service tax and VAT is charged in restaurants.

Photographs: Rohan Tiwary
Tags: VAT