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DHCBA gets restaurant service tax law wrong in ‘public interest’ notice

DHCBA service tax on eat (via Vineet Soni - Facebook)
DHCBA service tax on eat (via Vineet Soni - Facebook)
The Delhi High Court Bar Association (DHCBA) published a notice on Saturday that appears to have incorrectly explained the service tax (ST) rules on restaurant bills, wrongly urging its members, families, friends and clients to refuse paying the correct amounts.

Contrary to the actual legal position, the notice asserted that restaurants should levy ST only on “service charges” added to the bill, and urged “members, their family, friends and clients” to “rightly refuse to pay the extra tax and see the difference”.

The notice printed on DHCBA letterhead and published on its noticeboard wrongly stated:

“It has come to notice that many hotels and restaurants make the customers pay more than what they are supposed to pay by way of service tax. Service tax is payable only on the ‘service charges’ and not on the items consumed.

“What the restaurants and hotels do is they add the service charges to the cost of items consumed and then charge service tax at the rate of 4.94% on the whole amount, whereas it should have been charged only on the service charges.”

However, the law actually provides for the levy of ST on the sum of the food and beverage charges and the service charges, according to several sources.

The Department of Revenue’s service tax guidebook on page 115 and 116 (via @gautham1016 on Twitter) states that service tax on supply of food and beverage by restaurants is governed by Rule 2C in the Service Tax (Determination of Value) Rules, 2006.

For restaurants with air-conditioning facilities, 40 per cent of the total billed amount is subject to service tax, notes the guidebook.

According to an explanation by chartered accountancy firm Arkay & Arkay (via @ThePallav), the Tax Research Unit (TRU) of the Department of Revenue has also clarified that “the gross price charged by the restaurant for the taxable service, [includes] any portion shown separately e.g. service charge”.

Therefore, the total price for food, beverages and any service charges added on the invoice, are taxable at 4.94 per cent (equivalent to 40 per cent of the current service tax rate of 12.36 per cent). However, any discretionary service charge left by a patron, is not service taxable, explains Akosha.

DHCBA secretary Mohit Mathur told Legally India that after the “anomaly” came to the notice of the executive members of the DHCBA, they consulted a lawyer specialising in taxation and proceeded to issue the notice in the public interest.

“We will again consult them and if the position is indeed contrary we will issue a clarification,” he said.

Hat tip also goes out to Twitter users @gkjohn, @madmanweb, and others for clarifying

Update: The error in the notice was first blogged about on Friday by Dushyant K Mahant.

Letter via Vineet Soni

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