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Service Tax, VAT in Restaurant Bills- Know What You're Paying For

June 19 , 2013

If you have ever pored over the Pizza Hut bill or a restaurant bill you would have noticed that you ended up paying a lot more than the menu cost. The fact is a number of other charges are levied on the food and services part of the bill which make the final bill much bigger. This article will graze you through the charges you will see in a typical restaurant bill.

Service charge in restaurant bill

Service charge is the new name for tip. Restaurants have spared you the difficulty in deciding how much tip to pay (or for some, whether to pay tip or not). This charge is usually 5-10% of the food and beverages bill. Not all restaurants charge it but most big ones and eating joints include 10% service charge in the bill.

Service tax in restaurant bill

Service tax is charged by the central government. All restaurants or eating/drinking hubs including the likes of Mc Donald's, CCD etc with air conditioning or central air heating service are liable to service tax.

It is a flat 12.36% of cost of services charged. However since your bill includes both the cost of food and services provided, restaurants have abatement to the tune of 60% for service tax. Thus just 4.944% (which is 40% of 12.36%) of the bill is what you need to pay as service tax.

The restaurant or eating joint is supposed to pay service tax even if they do not provide air conditioning or central air heating service all year round. Further as per the law, if they have air conditioning or central air heating in any part of the establishment they would levy service tax.

Menu cost in non AC part of restaurants is usually lower but you won't be spared service tax even if you sit in the non AC area of a restaurant.

VAT in your restaurant bill

Your restaurant bill could also have VAT. Value Added Tax (VAT) is a state tax. It is in 5-20% range and varies across states, within states and items. In food items it is different for alcoholic and non-alcoholic foods. VAT is charged on food and beverages cost plus service charge, if it exists.

When restaurants buy packaged products they already pay VAT so they should not charge you VAT for them. But if you check bills you'd find that most of them include these too for VAT. You can contend this next time, if you wish. Similarly they should give you separate bills for alcohol and non-alcoholic stuff since VAT is different for these.

Thus this is what a typical restaurant bill break up would look like:

Item on bill

Charge

Food and beverages

Rs 2,000

Service charge

Rs 200

VAT @ 14.5% (of Rs 2200)

Rs 319

Service tax @ 4.944% (of Rs 2200)

Rs 109

Total

Rs 2,628


Just for your info

Rules dealing with service tax on restaurant are not free of disputable issues. For instance, amendments made by the Finance Minister in 2013 brings home-delivery food bills in the service tax ambit. But service tax rules can be interpreted to say that it is not to apply on take-away food bills since air conditioning is not being provided.

Similarly there is the problem of double taxation through VAT and service tax. You pay tax on 40% of the bill as service tax but VAT is again charged on that portion of the bill too.

Other charges on a restaurant bill

Some eating joints and restaurants include fancy charges in the bill. For example, a restaurant in South Mumbai charges Rs 5 towards charity on every bill. Not a bad idea at all to donate to charity but we presume everybody would like to make informed donations. This particular restaurant bill does say in fine print that the contribution is voluntary and that it goes to a particular school.

Finally not to miss the cesses. On bills with service tax 4.944% or less two education cesses of 2% and 1% of the tax is levied.

What's your takeaway?

Hospitality services like eating joints and restaurants have become ultra creative in crafting bills. Next time around, especially if the ambience is great, you should hang on longer to understand what all they are charging you for. 

If the intention is just to enjoy good food and you're not too bothered about service or ambience, go to small restaurants with no AC because otherwise the food may or may not be mouth watering but the bill will bring water to the eyes!

For final recap, service tax in A/C restaurant ought to be 4.944% of the bill (food charge + service charge, if any, and excluding VAT).


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