Computation of Food Bill Served in Restaurant
Excited to go out for dinner and you see an advertisement Rs 1000/- per person (taxes extra). You take your family of 3 out and expect a bill of Rs.3000-3300/- and are surprised to see a big jump in figures. Every time you go and dine out in a restaurant, the food bill turns out to be more than expected. And then when you go through the Bill in detail to cross check the charges levied, you realise that there are a whole lot of charges and taxes which have been levied on the food bill and the calculation is so complex!!!
You discover that there is service charge, service tax and vat levied as taxes. Now what is the difference between this service charge and service tax? Are we becoming fools? Why are we paying two kinds of service taxes?
Let us understand the taxes:
Charges and Taxes on Food served in Restaurants
When you dine out at a restaurant, the following charges and taxes are normally levied on your food bill:-
1. Service Charge: This is a charge levied by the Restaurant Owners as payment for the Services rendered like serving the food etc. This Charge is not levied by the Govt and is collected by the Restaurant Owners themselves. This charge is optional on the part of the Restaurant and they are free to charge any amount as Service Charge after making proper disclosures in the Menu Card. In other words, Service Charge is a Mandatory Tip to be paid, if proper disclosures for the same are shown in the Menu Card.
Different Restaurants levy different Service Charges, although it is normally in the range of 5% to 10%. Some Restaurants simply mention service charge extra. So be ready to pay it, it could be anything. Service Charge is meant only for dine-in customers and not for Takeaway or Home-Delivery Customers. Levying service Charge is entirely at the sole discretion of the Restaurant Owner and they are free to levy any amount as Service Charge.
2. VAT: VAT is Value Added Tax levied on the sale of any item. As food is being sold in a restaurant, VAT is liable to be paid on such sale. VAT is levied by the State Govt and is at the sole discretion of the State Govt. Different States prescribe different rates of VAT. Moreover, even in the same state, different Rates of VAT have been prescribed for different items.
The Rate of VAT is different for Alcoholic Beverages and different for other food items.
3. Service Tax: When you go to a Restaurant, you not only go there to eat food but also avail of various amenities and hospitality services. The Cost of Food as shown in the Menu Card is a composite charge and includes not only charges for the Cost of Raw Material but also for the Cost of the Services rendered. And as these Services are being rendered, the Centre Govt collects Service Tax on the Services rendered.
Although Restaurants nowadays are collecting Service Charges separately, but that is not enough to cover the Cost of Services provided and therefore, a portion of the Cost of Services is also included in the Cost per Dish.
Applicability of Service Tax on Food in Restaurants
We don’t always go in a restaurant for both Food + Services. Many a times, people go in a small nearby restaurant not for the services provided but only for the food. In such cases, Service Tax won’t be leviable.
To distinguish between whether a customer is going to a restaurant only for the Food or for both Food + Services, the Govt has announced the following conditions for the levy of Service Tax in a Restaurant:-
- The Restaurant should be Air Conditioned,
- Restaurant should have license to serve liqour.
However, in the Budget 2013, P. Chidambaram removed the 2nd condition and now Service Tax would be levied on all Restaurants which are air conditioned.
Service Tax on Food Served in Restaurants
The Charges for the Food served in a Restaurant is a composite charge for the food as well as for the Services. As it is a composite charge, Service Tax cannot be levied on the whole amount.
Bifurcation of the Total Bill into 2 parts i.e. Value of Goods Sold and Value of Services Provided is very difficult. Therefore, in case of any Composite Charge, the Govt usually announces an abatement scheme wherein Taxes are not levied on the total amount but only on a certain portion of the total amount.
In order to ensure transparency and standardisation in the manner of determination of the value of such service provided in a restaurant or as outdoor catering, therefore Service Tax should be charged only on 40% of the Food Bill (incl Service Charge) and not on the Total Bill Or in other words only 4.94% Service Tax on Restaurant (i.e. 40% of 12.36%) shall be chargeable.
ANOTHER IMPORTANT POINT ON VAT on Food Bill
As per the Service Tax Rules, Service Tax on Food served in Restaurants is chargeable on only 40% of the Food Bill as they’ve estimated that out of the Total Food Bill – 40% is for the Services provided and 60% is for the items sold. Now as per this logic, VAT should be charged only on 60% of the Food Bill as Service Tax has already been charged on 40% of the Food Bill.
However, this is not the case. VAT Laws specifically state that VAT Rate is to be applied on the Total Food Bill (incl of Service Charge).
Please Note: Service Tax Laws are framed by the Central Govt and VAT Laws are framed by the State Govt
EXAMPLE FOR CALCULATION OF TAX:
Tax has been explained below with the help of an example. For the purpose of simplification, VAT has been presumed at 14.50% on the Total Food Bill.
However, in case the food is not being served in a restaurant and is being served as part of outdoor catering, service tax should be levied on 60% of the Total Bill. Note: There are some ongoing litigations on the percentage on which service tax can be charged. Service Tax Rules very clearly state that Service Tax is also to be charged on 40% of the Food Bill. So at present service tax is charged on 40% of food bill only.
ASSUMING YOUR FOOD BILL IS RS 1000/-
COST OF FOOD—- 1000
SERVICE CHARGE @ 10% 100
TOTAL 1100
SERVICE TAX 4.94% OF 1100= 54.34
VAT @ 14.50% OF 1100= 159.40
TOTAL TAXES=100+54.34+159.40=313.84
TOTAL BILL= RS 1313.84
FOR 3 PEOPLE BILL WILL BE 1313.84*3= Rs. 3941.52/-
The information is very enriching. Thanks. I am interested in numerology too. Pls share some useful information on numerology.
Thanks so much Manjinder for this very useful information! Total clarity n awareness now reg these levied charges. 🙂
there is any surcharge on food in haryana.
Hello Mam,
Is VAT also applicable on Sarvice Tax? I had a visit to a restaurent in Gurgaon and they are charging VAT on total money (Food + Service Charge + Service Tax)! Is this written in Haryana VAT act? Please clarify.
Thanks
Punit