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Service Charge and Service Tax in Restaurants and Hotels

1 November 2012 Written by: No Comment

As linking to our previous post about Service Tax, here I discuss about what you should know about how you are charged when you go to a restaurant or hotel.

The calculations and service tax rates discussed here are current and with effect from this latest budget.

As calculated in our previous post about service tax, the current effective service tax is 12.36%.

Service Tax in Restaurants

Service Tax and Service Charge in Restaurants

Which restaurants are liable for service tax?

The restaurants which have air conditioning facility and have license to serve liquor(alcoholic beverages).

The restaurant can have the air conditioning facility for the full year or part. The air conditioning facility can be also at some part of the restaurant.

Also, service tax will be charged even if you order food and non-alcoholic beverages.

Service charge is a form of forced tip to the restaurant. Generally, it’s 10% of the bill amount. This charge is split among the waiters and kitchen employers. Also, you are not bound to pay any tip if you are giving service charge to a restaurant.

The Service Tax is applicable on 30% of the Bill @ 12.36% (the net rate of Service Tax comes to 3.708%). Here the bill is (total amount + service charge).

After the service tax is applied, now it comes to VAT. VAT varies from state to state and also from item to item. VAT on food is 12.5. VAT on alcoholic beverages is 20% (irrespective of the level on content of alcohol in the beverage).

This calculation is simple as shown in the figure below.

Service Tax in Restaurants

One very important thing is, you have to pay VAT only on unpackaged food items. You should not pay VAT on packaged water and soft drinks. This tax has been already paid by the restaurant to the vendor.

Service Tax in Hotels

The service tax rate for Rooms in Hotels is as follows.

If the tariff of the room is Rs 1000 and above, then the Service Tax payable will be on 50% of Room Tariff @ 12.36% (the net rate of Service Tax comes to  6.18%).

For Mandeep Keeper like the Hotels/Restaurants/clubs for holding social functions such as marriage, conferences and seminars where substantial food is served.  Here, the Service Tax payable will be on 60% of the total bill@12.36% (the net service tax comes out to be 7.416%).

Thus, we discussed the Service Tax and Service Charge in restaurants and hotels. The image in the post clearly described each component of the bill/invoice and how they are calculated.

So, next time you go to a restaurant or hotel, make sure that the restaurant follows the proper norms and you are not cheated. For further discussions regarding this, please feel free to comment.

So, stay updated how you spend every penny from your income. It always helps.

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