Service tax on Hotel Accommodation Restaurant Unconstitutional; HC sets aside levy of ST

In one of the important judgements in the recent times, which has come as a blow to the Revenue, Honorable High Court has ruled that Service tax on restaurants and hotel accommodations are unconstitutional and had set aside the levy of Service Tax on the same.

It is said that some things which seem to be very authentic may not be always correct. This is same which is happening with issue of Service tax on supply of food in restaurants. Internet is equal for both whether you are correct or factually incorrect.

I have received one mail cautioning you on how to save your money on incorrect charging of tax, which Restaurants are looting which has now received wide circulation on professional and social networking sites. To be frank, I could not ignore it, because it seems misleading to me. The relevant part of that mail is as under:

“We had been to several restaurants recently. I observed that "service tax" has been misused and charged to the customers like you and me.

Let me give an example.

Food and Beverage	=	Rs. 1000.00
Service Charges @ 10%	=	Rs. 100.00 (10% on the Food and beverage amount)
Service Tax @ 4.94%	=	Rs. 54.34 (4.94% on F&B + Service Charges)
VAT @14.5%	=	Rs. 145.00
Total	=	Rs. 1299.34

As per the definition - "Service Tax can be charged only for the services provided to the customer".

Now, see what is happening here in the above said example.

Service Tax should be charged only on the Service Charges amount i.e Rs.100 and not on the entire amount (1000+100).

In this example, the customer should be charged only Rs 4.94, whereas he has been charged Rs. 49.00 extra.“

Through this write-up it has been tried to clarify the misconception roaring around everywhere.

Issue

Whether service tax can be charged by restaurants, if yes on what value and at what rate and what are the implications of VAT?

Present understanding

The interpretation of that mail (which seems acceptance from experts too) is that Service Tax should be charged only on the amount charged for service provided. Hence, customer should be charged only Rs. 4.94 on Service Charges amount i.eRs.100 and not on the entire amount (1000+100).

Before reaching to nay conclusion, it is pertinent to first check the legal position.

Legal position

1. Exemption

Can all restaurants charge service tax or is there any specification?

Sr. No. 19 of the notification No. 25/2012 – ST dated 20th June 2012 exempts Services provided in relation to serving of food or beverages by a restaurant except those having:

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

b) License to serve alcoholic beverages.

2. Valuation

Rule 2C provides the mechanism for determination of taxable value of service portion involved in supply of food or any other article of human consumption or any drink in a restaurant or as outdoor catering. The same is reproduced as under: -

Subject to the provisions of section 67, the value of service portion, in an activity wherein goods being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as part of the activity at a restaurant or as outdoor catering, shall be the specified percentage of the total amount charged for such supply, in terms of the following Table:-

SI. No.	Description	Percentage of the total amount
(1)	(2)	(3)
1.	Service portion in an activity wherein goods, being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as a part of the activity, at a restaurant	40
2.	Service portion in outdoor catering wherein goods, being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as a part of such outdoor catering	60

Thus, the basis for charge of service tax by restaurants depends on following:-

a) Rule 2C of the Valuation Rules, 2006,

b) Sr. 19 of Notification 25 -2012 (service tax).

Service tax which should be charged in restaurants is as follows:

12.36% of the gross bill i.e. 40% of (service charges + cost of food and beverages   excluding VAT). Which is equivalent to 4.94% of the total bill (12.36 % of 40% of x = 4.94% of x).

Practical Example:

Calculation of service tax

(1) On Bill amount                                                

(2) On service tax rate

Food and beverages: 1,000 Service charge (if any): 100 Total: 1,100 Service portion @ 40%: 440 (1100*.40) Service tax @12.36%: 54.386

Food and beverages: 1,000 Service charge (if any): 100 Total: 1,100 Service tax rate @ 40%: 4.944% (12.36%*.40) Service tax @4.944%: 54.386

1) VAT

Value added tax is applicable on sale of good and beverages as per state VAT act. VAT on restaurants serving food and beverages are governed by respective state laws. The rate of VAT may vary from state to state.

What you need to remember?

Service tax: Before paying service tax see whether this restaurant is:

a) Air conditioned.

b) Serving alcohol beverages.

If yes, service tax should be only on 40% of bill amount (cost of food & drinks + service charge) or charged @ 4.944% on total bill amount.

Service Charge: It depends on your wish; if you want to pay you can pay. It is collected as a tip for persons working in backend except waiter.

Before parting, Service tax Law (unlike other laws) is more complex and complicated, but thanks to Negative List which has simplified it to much extent. It is humble request to first verify factually and legally any such misleading post which may have serious repercussions, as happened to Delhi High Court Bar Association.