Laying to rest taxation at Indian restaurants

Jul 18, 2016 | Personal taxation in India | 0 comments

In addition to the ridiculously high VAT, our stupid authorities have added this nonsense of service tax, currently 15%. Too many people are busy posting incorrect information about taxation rules at restaurants. While this is highly appreciated, i.e. the more people are involved in spreading awareness about such matters, the better it is of course. But the problem is that incorrect information spreads just as fast. So lets lay the taxation angle to rest in this post.

Misleading calculation example

Food and Beverage = Rs. 1000.00
Service Charges @ 10% = Rs. 100.00
Service Tax @ 4.94% = Rs. 54.34 (on F&B + Service Charges)
VAT @14.5% = Rs. 145.00

Total = Rs. 1299.34

As per the definition – “Service Tax can be charged ONLY for the services provided to the customer”. Now, see what is happening here in the above example. Service Tax should be charged only on the Service Charge amount i.e Rs.100 ONLY, and NOT on the entire amount (1000+100). In this example, the customer should be charged only Rs 4.94, whereas he has been charged Rs. 49.00 extra.


Correct calculation

Service Tax is computed on full bill after abatements.

The abatement allowed is 60%, i.e. 40% of the food bill is assumed to be “service”, and the greedy govt wants a share of this. So final service tax component = 6% (0.4 * 15%) of total bill.

And thats the only correct calculation.

Notwithstanding the fact that we end up paying both VAT and Service Tax on the 40% component. Thats double taxation. (In fact one might be compelled to say that its triple taxation since tax on income has already been paid, thats direct tax. While service tax is consumption or indirect tax.) The correct method would have been to charge VAT on the “product” part, i.e. 60%, and Service Tax on the “service” part, i.e. 40% of the bill amount. But like I said, greedy govt.

Further reading

Another excellent reading on this topic: Service Tax in Restaurants – What the law really says!

And an even more elaborate post which should leave no doubts in anybody’s mind:Computation of service tax on food served in a retaurant

PS1: I refuse to patronize restaurants that tack on a “service charge”. Its my prerogative to tip based on the service and I’ll be damned if I pay the fixed 7-10% that the owner wants to squeeze out of me. For others who insist on being scalped, at least don’t prove that you are a moron by leaving an additional tip, just because your credit card slip has such a provision, or you are feeling even more generous, or cant be bothered with simple maths. Do realize that between VAT, service charge and service tax, you are ending up paying THIRTY PERCENT in extra charges on the food bill. If that doesn’t scare you from eating out, you probably deserve to be taken advantage of ?

PS2: Please make it a point to calculate the right amount of taxes and check that the restaurant is authorized to collect. Only A/C restaurants can collect. I’ve taken to tasks restaurants which collect taxes without TIN number, etc on bill.