Tax in Restaurants

While we waited on our cheque and noshed on the after-meal mints after a sumptuous meal, we estimated the value of our damages. To our surprise, it was for 1.4 times the amount that we had calculated. Saddened by the extra bucks that were shelled, we decided to carry it home and check how much money we were dropping in the Government coffers.

Here’s what we found out:

Any cheque (American: check) has the following 3 vague components:

1. VAT: The price that is generally mentioned on the restaurant menu is the delicacy price. It is the price that you pay for the delicacy as a product and not a service. For taxation purposes, it is treated similarly as any manufactured product is treated. You buy the raw material, add value to it (to be specific, cook it) and pay tax in form of Value added tax (VAT) on the value added. VAT is a state imposed tax and may be different in different states for different products. States also differ in defining their taxation on beverages; some include both soft drinks and liquor in beverages and tax them highly and some like in Delhi tax soft drinks at the normal F&B rate and the beverages at a higher rate.

2. Service Charge: Service charge is the charge levied by the restaurant on the service it provides. It includes, but is not limited to, serving food, helping you with placing your order or anything to help you with relishing your meal. It is charged by the Restaurant and not by the Government. The rate charged depends at the discretion of the restaurants and are not controlled by the Government. There could be three ways in which a restaurant can levy the service charge:

a. Completely included in the price mentioned on the menu or not charged explicitly

b. Partially included in the price and

c. Not included in the price

In the latter two categories, the extra service charge rate should be mentioned on the price list, else the restaurant can’t charge it to the customers.

3. Service Tax: Service tax, as evident by its name is levied on the service provided by the Government. However, in case of restaurants, it is difficult to segregate the food and the service component in a bill. As a result, it is assumed that out of the total bill, 40% is for the services rendered and hence the Service Tax of 14% is charged on this amount. It effectively amounts to 5.6% of the total bill which includes the delicacy prices and the additional service charged levied but not the VAT charged. It should be noted that service tax is only applicable on air-conditioned restaurants where the food is served in its own premises and not on take-way or home-delivery. However, they can levy service charge if the menu mentions so. Restaurants doing home-delivery might levy service tax because it is difficult