AC restaurants can levy service tax on food, beverages

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 mshethco@yahoo.co.in