Deciphering Taxes, Charges and VAT on Restaurant Bills

Service Charges on the Restaurant Bill

Although Service Tax and Service Charge may sound like the same thing, they are not. The Service Tax was imposed by the Government while the Service Charge is collected by the restaurant from the customers (and, unlike service tax, the service charge still exists today). 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 to 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 was charged on the sale of every item. Since VAT came under the ambit of the State Government, the VAT rates varied from one state to another. Even in the same state different rates of VAT were charged for different items. VAT was charged at every step of production or distribution of goods and services.

VAT could only be charged on the food and non-alcoholic items prepared in the restaurant and not for packaged food. Usually, the VAT charged was between 5-20%. Note that VAT still applies today to alcoholic liquor served in restaurants, as alcohol for human consumption was kept outside GST.

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) were taxes collected in addition to Service Tax for financing as well as promoting Swatch Bharat Abhiyan & Krishi Kalyan Yojna. Both cesses were abolished along with service tax when GST arrived on 1 July 2017.

These taxes were imposed on every taxable service at the rate of 0.5% each. SBC and KKC were charged, collected and paid to the Government of India, apart from the Service Tax. Restaurants had to charge and account these taxes separately in invoices and account books. Swatch Bharat Cess and Krishi Kalyan Cess had to be paid under separate accounting codes 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 was 14%. Along with Swachh Bharat Cess tax at 0.5%, the rate charged on the bills was 14.5%.

From June 1, 2016, 0.5% Krishi Kalyan Cess was also added to this taxation, making the total Service Tax levied on the consumer up to 15% — the final rate (14% + 0.5% Swachh Bharat Cess + 0.5% Krishi Kalyan Cess) before service tax was abolished on 1 July 2017. Service Tax was chargeable only on 40% of the total value of the bill, which was the standard service expense. This means that as per the policy initiated by the Government of India, the Service Tax was not chargeable on the whole amount but just a portion of the bill.

Awareness of the taxes that were charged on the total bill while eating out at restaurants in the pre-GST era helps citizens understand how the system worked, and how today a single GST line item replaced the combination of VAT, service tax and cesses.

In India, the service charge is printed on the menu informing the customer about it, which is why restaurants treat it as payable, even if the customer wasn't impressed with the service provided at the restaurant. The service charge is not a tax and continues to exist under GST.