`Service charge' in restaurant bills is not all tax, clarifies govt

Service charges levied on customers by some restaurants are not service tax and these amounts do not end up in the government exchequer and are retained by the outlets, the finance ministry has clarified.

''Some restaurants/hotels/eateries besides charging for the food and beverages are also charging 'service charges' in their bills. The proceeds of the 'service charges' are retained by the restaurants/hotels/eateries,'' the finance ministry stated in an official release.

''These 'service charges' collected by the restaurants/hotels/eateries are retained by the restaurants/hotels/eateries and are not 'service tax' imposed by the government,'' the release clarified allaying misapprehensions of the consumers that these 'service charges' are being collected by the restaurant on behalf of the government as tax.

The ministry further clarified that effective service tax rate in respect of services provided in relation to serving of food or beverage by a restaurant, eating joint or mess having the facility of air-conditioning or central air-heating in any part of the establishment is 5.6 per cent (14 per cent of 40 per cent) of the total amount charged.

With the increase in the service tax rate to 14  per cent from 1 June, the service tax rate on food served in such restaurants is effectively 5.6  per cent of the total amount charged.

Finance minister Arun Jaitley, in his budget, had proposed to raise service tax from 12.36  per cent (including education cess) to 14  per cent. The tax is levied on all services, except a small negative list.

Last month, the ministry announced that restaurants without air conditioning facility will not charge any service tax from their customers while those with ACs will charge only on the 40  per cent of the total bill amount.

"Restaurants, eating joints or messes which do not have the facility of air-conditioning or central air-heating in any part of the establishment are exempt from service tax," the ministry said in a clarification.

"In other words, only air-conditioned or air-heated restaurants are required to pay service tax," the statement said.

For such restaurants, 60 per cent of the value is to be deducted from the total amount charged while applying the rate of service tax, and tax is to be calculated on the balance 40  per cent, it added.