Different taxes paid while dining in a restaurant

If you are a foodie or have weakness for eating outside in hotels, then you surely need to know what are the various taxes which you pay. The tax structure in different cities determines the price of food there. Most of us are often unaware of which tax is legitimate and which is not. This article would help you understand the different taxes prevalent in restaurants.

Tax structures

Often people pay more than the actual cost of a single meal in a restaurant. It is the tax structure that confuses them.

Service charges: Do you know that you are not bound to pay tips for the services you avail from the restaurant. You could pay a small tip if you are satisfied with the services—but that is discretionary. Generally, 10% of the total bill amount is considered as a tip and is charged in the form of a service charge. For instance: If the cost of the food which you eat at a restaurant is Rs. 1,000, the bill / invoice already adds 10% to the food. Hence the amount would be Rs. 1,100. Thus, the additional Rs. 100 is the service charge or tip paid to the hotel for the services offered to you.

Service tax: Many restaurants would charge you a service tax for the services offered. From the 1 April 2012, service tax rate is 12.36% (including cess) applicable to all services. If you buy packed food (manufactured by someone other than the restaurant owner), you should not be paying service tax, because the due taxes should have already been paid by the restaurant while purchasing it from the vendor.

The Department of Revenue’s service tax guidebook (page 115 and 116) mentions that service tax for restaurants with air-conditioning facilities, 40% of the total billed amount is subject to service tax. The Tax Research Unit (TRU) of the Department of Revenue also mentions that “the gross price charged by the restaurant for the taxable service, [includes] any portion shown separately e.g. service charge”. Therefore, the total price for food, beverages and any service charges added on the invoice, are taxable at 4.94%(equivalent to 40% of the current service tax rate of 12.36%).

VAT: The hotel bills often comes with value added tax (VAT) of 14.5%. Some hotels add VAT on the entire bill amount, which is actually illegal. The 14.5% VAT can only be charged on the bill amount for items prepared by the restaurant itself. No VAT should be charged on items like packaged drinking water, soft drinks and other packed food items. The hotel owners pay VAT to the state government.

The Union budget 2013-14 has proposed to levy a service tax of 12% on all air conditioned restaurants over and above the applicable VAT. At present, the service tax was levied only on restaurants and hotels serving liquor. However, this new budgetary announcement brings every big and small restaurant having ACs under its ambit.

Now, next time when you dine in a restaurant / hotel make sure you check the above charges. Ensure that you check the bill thoroughly before settling it as you may be overcharged or billed for something you have not ordered. If you have any doubts get it cleared right away. You can challenge the bill if you are not satisfied.

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