Friday, May 3, 2013

Service Tax - What are restaurants doing?

It's been over 5 months since any AC restaurant in India was supposed to have started charging service tax of 12.36% on 40% of the total bill value - i.e. 4.944%. What are various restaurants doing?

1) To be on the really safe side, some restaurants are charging 4.944% on the entire bill value and the customer pays for the service tax. The restaurants can then claim input credit for any service tax they pay. So in some ways, the customers are now paying extra and some portion of the extra amount is a benefit to the business because of the offsetting with the input credit.

2) A few restaurants are charging service tax only for dine-in customers. They do not charge the service tax for take-aways and deliveries. This issue is still ambigious and hopefully the service tax department will issue a clarification for the same. Whatever material is available in the public domain - CA Club forums etc. seem to suggest that all sales originating out of a AC restaurant is applicable for service tax.

3) Restaurants which use a composite VAT model need to charge service tax on the bill value - minus VAT only. i.e. If the bill amount is 100 and the VAT is 4% (in Karnataka) - the real bill value is 96. So service charges needs to be charged on 96 and not on 100. Most restaurants don't do this - they charges service tax based on a sale value of 100.

Most customers seem to gotten used to paying this extra 4.944%. For restaurant owners, this is yet another issue to deal with now in the wake of spiraling input prices.