Service Tax in Restaurants - What the law really says!



On Saturday, November 3, 2012, The Delhi High Court Bar Association published a notice titled “Service and Service Tax!” (shown above in the image). The notice contained averments claiming that restaurants in India were incorrectly charging 4.94% service tax on the total bill of a customer and that service tax payable at a restaurant is only payable on the ‘service charge’ component of the Bill. The contents of the notice were also spread among lawyers and law students across the country via Facebook and tax law related websites such as CAClubIndia etc. This news spread like wildfire and became very popular online since the averments indicated overt defraudment of the public and many people resorted to expressing their resentment about the same on social media sites, under the impression that the contents of the notice were based on the correct position of law.


At the outset, I’d like to make it clear that the notice has been made based on an incorrect interpretation of the Service Tax (Determination of Value) Rules, 2006 and that this would be evident if one merely looked at the relevant provision in the rules. Let me try to explain the correct position of law as simply as possible.

Rule 2C, inserted via the Service Tax (Determination of Value) Second Amendment Rules, 2012 provides that:

"2C. Determination of 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.- 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 a 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, namely:-

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 %

Explanation 1.- For the purposes of this rule, "total amount" means the sum total of the gross amount charged and the fair market value of all goods and services supplied in or in relation to the supply of food or any other article of human consumption or any drink(whether or not intoxicating), whether or not supplied under the same contract or any other contract, after deducting-
(i) the amount charged for such goods or services, if any; and
(ii) the value added tax or sales tax, if any, levied thereon:"

What this means is that service tax as prescribed by the rules is chargeable at normal rates i.e. 12.36 %. This rate is applicable to only 40% of the total bill amount, since the rest falls under the abatement mentioned above. Since 12.36 multiplied by 0.4 is 4.94%, this is the percentage of tax that is to paid on the TOTAL bill amount (since Explanation 1 says that 'total amount' means gross amount charged in or in relation to the supply of food etc.). There is no involvement of a ‘service charge’ component here since the abatement of 60% means that 40% is considered as the implicit service charge for taxation purposes.

Thus, it is quite evident that the service tax of 4.94% is to be calculated on the Total Bill Amount and not merely the ‘service charge’ component of the Bill, as claimed by the Notice.

First of all, I think it is highly irresponsible that a well respected body such as the Delhi High Court Bar Association would release such a notice without backing the same with the requisite amount of research. Owing to the source from which the notice was released, most lawyers and law students did not bother to check the veracity of the claims since they assumed that the authors of the notice would know their law. I think they should rectify the harm done by issuing a press release accepting that what was stated in the notice was incorrect in law. Secondly, what this whole debacle illustrates is the lack of knowledge on service tax among the legal community. The general conception among law students that tax law is greek and latin does not help this cause either. So, in simple terms, everyone just assumed that since it’s called ‘service tax’, it is paid only on the ‘service charge’, which seems very logical. I think this should be a sort of wake up call to all interested students/general practitioners who believed this story and they should seriously consider brushing up more on their tax law knowledge.

Owing to the growing rate of Facebook hoaxes, as aptly underlined by the whole ‘Samsung paid Apple in pennies’ incident, as lawyers/law students, I feel it is our duty and moral responsibility to do research and to verify ANY claim based on ANY law ourselves before sharing it on a social media site. The ignominy that this incident has attached to it is as shameful as a doctor prescribing incorrect medicine for a fairly obvious disease. We are supposed to know the law, and even if we don’t know it yet, we absolutely MUST find out what the law is before giving advice to the public because that is what our law schools, internships and careers are supposed to teach us – how to do legal research!

24 comments: (+add yours?)

charlylisle said...

Today, people are more interested in taking dinner and lunch in restaurants. For those people above article is too useful. Restaurant Service has been defined in a section 65. Restaurant must need a license to serve alcoholic beverage under the service tax.

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ZeHawk said...

Excellent article, I've been trying to educate people as well when I see them posting incorrect info on this topic on FB, etc. I wrote a post on my blog on this, then found yours, and you've done a great job of explaining the same. Thanks.
My post is here: http://blog.zehawk.in/2013/03/laying-to-rest-taxation-at-indian.html

preeti mittal said...

This is really informative and interesting article. worth to read this post..nice sharing


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Pravimal Abhishek said...

Hi,

It was a very interesting article. But I have a question for you. Why is that we have a uniform tax slab for all the customers visiting restaurants? Because there are many people who place take away orders and there are others who prefer to dine at the restaurant.

It just took five minutes for me to stand at the counter and take my order. But I had to pay a service tax which was equivalent to those who were dining at the same place. Some of those dinging there might have placed an order whose value is equivalent to my take away order. But both of us paying the same amount of service tax seems unreasonable.

I think there should be different service tax rates for take away customers and those who are dining at the restaurant.

What are your views on this?

Gaurav verma said...

Restaurants business has been growing lately. Some people thing it's not a good business to start. I would disagree since for some reason. It's easy to apply for this business' registration, and a lot seeks for this service. We start Catering Service in Delhi, India and its growing up day by day.

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Karen Baker said...

Why we need to include service charges with Total Food Bill while calculating service tax and VAT, the tax should be calculated only on Total Food bill…right? Does Taxes applicable on Service charges too?

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NagaRaj Raj said...

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amara sangati said...

This article is so true. We people now are more interested in the variety of dishes served rather than the will paid. We must look into the numbers deeply before knowing the actual value. For more info visit: Allindiaupdates.in

Sumit Vasudeva said...

Nice Blog such a very useful information about restaurants or Outdoor Catering

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