In this year’s budget, there was a proposal to charge service tax on services provided by restaurants. But restaurants do charge VAT on the bill, then on what amount should the service tax be charged? — Santosh Shetty
The Finance Bill 2011, which is passed by both the houses, proposed to levy service tax from a date to be notified on services provided by restaurants that have air conditioning facility in any part of the restaurant at any time during the financial year and it is licensed to serve alcoholic beverages. Service tax will be payable on the services in relation to servicing of food or beverage (including alcoholic beverages) in the restaurant premises.
From the above it can be concluded that once a restaurant has air conditioning facility, whether for the full year or part, and even if a part of the restaurant is air conditioned and has a license to serve alcoholic beverages, it will be liable to charge service tax. Service tax will have to be charged even if the customer orders only food or non-alcoholic beverage. The tax research unit circular issued on budget day has noted as under:-
The levy is intended to be confined to the value of services contained in the composite contract and shall not cover either the meal portion in the composite contract or mere sale of food by way of pick-up or home delivery, as also goods sold at MRP. Finance minister has announced in his budget speech that 70% abatement on this service, which is, inter-alia, meant to separate such portion of the bill as related to the deemed sale of meals and beverages. The relevant notification will be issued when the levy is operationalised after the enactment of the Finance Bill.
The reasoning given in the above circular for introduction of the levy is 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 personalised 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.
Since there is a component of service in the bill, service tax is to be charged on 30% of the bill value since VAT is being charged by the restaurants, service tax is restricted on 30% of the bill value.
The writer is with M.Sheth & Co, a chartered accountancy firm in Mumbai, and can be reached at email@example.com