Service Tax by Restaurants - A Little Garnishing
WITHIN a few minutes of uploading yesterday's DDT, we received several calls and mails from Netizens seeking more light on the issue.
Someone wanted to know if it is legal to collect service tax by all restaurants. Absolutely NOT.
First of all, is the activity of supplying food by a restaurant liable to Service Tax?
As per Section 66E (i) of the Finance Act 1994, "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" is a declared service.
As per the Act, "declared service" means any activity carried out by a person for another person for consideration and declared as such under section 66E ; and "service" means any activity carried out by a person for another for consideration, and includes a declared service.
So, supply of food, is a declared service - of course only the service portion in the activity of supply of food is liable to Service Tax.
Again, not all restaurants are levied Service Tax.
Entry No 19 of Notification No 25/2012 ST dated 20.06.2012 exempts:
19. Services provided in relation to serving of food or beverages by a restaurant, eating joint or a mess, other than those having (i) the facility of air-conditioning or central air-heating in any part of the establishment, at any time during the year, and (ii) a licence to serve alcoholic beverages;
So, service tax is applicable only if the restaurant has the facility of air-conditioning or central air heating in any part of the establishment at any time during the year (year has not been defined - Previous version of this tax under sub-clause 65(105)(zzzzv) clearly mentioned "financial year" - Now apply General Clauses Act?)and also has a licence to serve alcoholic beverages. If the restaurant does not have any of these two, no service tax will be applicable.
Someone asked about the valuation. In the example quoted yesterday, since the service charges (Rs 100/-) are shown separately in the Bill, he pointed out that service tax payable will be only Rs 12.36/- but not Rs. 54.34/-, computed at the rate of 12.36% on 40% of the gross amount charged.
It is important to note that serving of food in a restaurant is a composite transaction involving sale and service. While food is sold, services relate to the use of restaurant space and furniture, air-conditioning, waiters, linen, cutlery and crockery, music etc which are included in the Bill.
Article 366 (29A) includes the following in the definition of "tax on sale or purchase of goods"
(f) a tax on the supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration;
Having recognized serving food in a restaurant as a composite transaction, the question arises as to how to identify the service component. For arriving at the service component, an abatement of 60% has been provided for food sold under Rule 2C of Service Tax (Determination of Value) Rules, 2006 and the rest of the bill amount (i.e 40%) relates to services provided by restaurant on which restaurant is liable to pay service tax.
In yesterday's example, though Rs 100/- has been shown separately as service charges, these charges are often shared among the staff who attend on the customers. This amount does not represent full value of the service rendered by the restaurant, like space and furniture, air-conditioning, waiters, linen, cutlery and crockery, music etc.
Hence, in the example given yesterday, there is absolutely no error in computing tax liability.
Our last caller asked, "What if I carry my own bottle to the restaurant and get intoxicated"? Should the value be included?
Well, after getting intoxicated, it doesn't really matter even if the neighbouring table Bill value is also included!