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Deciphering Taxes, Charges and VAT on Restaurant Bills

Eating out in a restaurant is an expensive thing to do these days. The number of charges and taxes on the restaurant bill can be highly confusing, especially if an individual does not know the taxing system. There are different charges levied on a restaurant bill such as Service Tax, Service Charge, VAT, Swach Bharat Cess and Krishi Kalyan Cess.

Service Tax Levied on the Bill

The tax collected by the Central Government for the services provided is called Service Tax. While eating out at a restaurant, the restaurant offers various hospitality services which are chargeable along with the total bill.

The imposition of Service Tax is only payable by restaurants that have an annual turnover of Rupees 10 Lacs and above (not applicable in Jammu and Kashmir). The Bar Council on 3rd November 2012 passed a notice stating that Service tax should be charged on Service Charge and not on the food bill. This tax is supposed to be paid by the service provider, but the restaurant owner in turn transfer this tax to the customers.

Initially, Service tax was to be collected by air-conditioned restaurants that served both food and alcohol. This noticed was amended by former Finance Minister of India, P. Chidambaram. The rate of Service Tax is 14%, but restaurants provide both the product and service which is why the Central Government has subsidized 60% on the tax levied upon restaurants. Hence, the Service Tax levied by a restaurant has been reduced to 40% of the total bill, which is 5.6%. While paying the bill if Service Tax of 6% or 6.1% is charged then it is because the Service Tax and Swachh Bharat Cess & Krishi Kalyan Cess have been compounded together.

Service Charges on the Restaurant Bill

Although Service Tax and Service Charge may sound like the same thing, they are not. The Service Tax is imposed by the Government while the Service Charge is collected by the restaurant from the customers. The Department of Consumer Affairs declared that it was not mandatory for customers to pay Service Charge, but The National Restaurant Association of India objected this statement which is why many restaurants in India still ask for Service Charge in the total bill.

Depending upon a restaurant, a Service Charge can vary between 5% to 10%. It is up to the decision of the restaurant owner whether to charge this fee only on customers who eat at the restaurant or for home delivery. Usually, the high-end pubs, bars and restaurants levy Service Charge to ensure that the tips for their staffs are taken care of. The service tips are usually distributed amongst the employees of the establishment.

In India, one does not have to pay an additional tip to the waiter because it is already being charged for. The Ministry of Food, Public Affair and Distribution issued a notification stating that restaurants should apply service charges under the discretion of the customer, meaning that only if the customer is satisfied with the services he/she can pay the charges.

Value Added Tax or VAT Imposed on the Bill

VAT or Value Added Tax is charged on the sale of every item. Since VAT comes under the ambit of State Government, the VAT rates may vary from one state to another. Even in the same state different rates of VAT are charged for different items. VAT is charged at every step of production or distribution of goods and services.

It is important to remember that VAT can only be charged on the food and non-alcoholic items prepared in the restaurant and not for packaged food. Usually, the VAT charged is between 5-20%.

Swatch Bharat Cess and Krishi Kalyan Cess

Under Chapter VI of the Finance Act, 2015, Swatch Bharat Cess (starting 15th November 2015) and Krishi Kalyan Cess (starting 1st June 2016) are taxes collected in addition to Service Tax for financing as well as promoting Swatch Bharat Abhiyan & Krishi Kalyan Yojna.

These taxes are imposed on every taxable service at the rate 0.5%. SBC and KKC are charged, collected and paid to Government of India, apart from the Service Tax. Restaurants must charge and account these taxes separately in invoices and account books. Swatch Bharat Cess and Krishi Kalyan Cess should be paid under separate accounting code provided by the Government.

The Rate of Service Tax Levied by the Government of India

The rate of service tax levied by the Central Government is 14%. Along with Swachh Bharat Cess tax at 0.5%, the rate charged on the bills is 14.5%.

From June 1, 2016, 0.5% on Krishi Kalyan Cess was also added to this taxation, making the total Service Tax levied to the consumer up to 15%. Ideally, Service Tax should be charged only on 40% of the total value of the bill, which is the standard service expense. This means that as per the policy initiated by the Government of India, the Service Tax is not chargeable on the whole amount but just a portion of the bill.

Creating an awareness on the taxes charged upon the total bill while eating out at restaurants will educate Indian citizens about one’s rights. A knowledge of the various taxes that are part of a restaurant bill (apart from the food and beverage cost) will make a customer aware if the restaurant is charging unreasonable taxes.

In India, the service charge is printed on the menu informing the customer about it, which is the reason why it becomes mandatory to pay this tax, even if the customer wasn't impressed with the service provided at the restaurant.

In the News

  • All India ITR launches income tax e-filing app

    Indileak: As the last date for filing ITRs draws closer, many tech enabling platforms have attempted to produce software applications that make it easier for the taxpayer to meet legal requirements. All India ITR’s mobile app is unique in the sense that it is the first to work on both Android and iOS. You can find out more by following the link to the press release.

    13th June 2017

    Indileak