Restaurants in Mumbai to close on Monday to protest "irrational" service tax

Come Monday, some 27,000 hotels and restaurants in and around Mumbai will remain closed in response to a bandh call by the Indian Hotel & Restaurant Association (AHAR), to protest the imposition of service tax on all restaurants spotting an air-conditioner.

AHAR is not protesting the service tax as such but its "irrational" impost across all hotels and restaurants where the customer is not provided with the comfort of an air-conditioner.

It may be a strange logic that a customer is forced to pay for what he is not provided with. But the restaurateur has to pay for 40 per cent of all hotel bills if a portion of the restaurant hasinstalled air-conditioners, even if they are not being used.

The bandh call is being supported by the Federation of Hotels and Restaurants Association of India as well as hotel associations in Gujarat and Tamil Nadu among others.

The 12.63 per cent service tax on 40 per cent of hotel bills come over and above the 12.5 per cent VAT levy. These taxes add up to an average tax impost of a little over 21 per cent on the total sales of these restaurants.

AHAR had made several unsuccessful representations and submissions to finance minister P Chidambaram for roll-back of the levy, says AHAR president Arvind Shetty.

According to AHAR, a majority of these restaurants are low-budget eateries that are forced to keep at least a portion of the restaurant air-conditioned due to customer demand. A fresh impost adds to their already high operating costs.

Obviously, the 12.63 per cent service tax works out to an over 5.5 per cent across-the-board increase in costs. The cost additions in turn would force customers to look for cheaper roadside food sold by unauthorised vendors.

This would defeat the very purpose of the tax impost, says AHAR. Both the restaurants and the government will lose in the trade off, they point out.

Meanwhile, around 20,000 restaurants and hotels in Gujarat will also shut shop on 29 April to demand withdrawal of service tax on fully or partly air-conditioned restaurants introduced in the Union Budget 2013-14. Three- four- and five-star hotels will serve their resident guests at their restaurants, but will not entertain outside guests during the strike.

The Gujarat Rajya Hotel Federation (GRHF) has called for the strike as the new tax has started adversely affecting their business.

According to GRHF, the restaurants and hotels are already paying taxes to the state and this new tax is leading to double taxation.

The central government, meanwhile, is facing a problem of increased service tax evasion across various sectors.