Last weekend I took my family out for dinner. I read the menu, chose the dish, calculated the amount written next to it, and kept a mental note of the total bill which will come up. When the waiter came with the bill, I took out the sum which I had in mind. However, I was told the payment wasn’t enough. Then I decided to decode the bill—why did I pay more than what I had eaten for?
In addition to the cost of dishes, there was a service charge in the bill. Now, service charge is typically imposed by restaurants in lieu of tips awarded by customers as a token of satisfaction with the services provided. It is nothing but an organised and enforced way to collect tips for waiters and support staff. And there are no guidelines for this. It can vary from 4% to 20%, depending on the restaurant/hotel’s internal policy and sometimes mood.
Contrary to popular belief, service charge is not a statutory levy, and the finance ministry has recently clarified this issue.
It would be great if restaurants abolish the levy of service charge on invoices and instead allow customers to tip their servers as per their whim.
Next was the service tax. It is a central levy imposed on the provision of taxable services in India. Currently, service tax is chargeable on services provided by restaurants, eating joints or messes that have air-conditioning or central-heating in any part of the establishment in relation to serving of food or beverage.
The charge for food served at a restaurant is a composite charge and it is challenging to separate the value of food and services. An abatement scheme is available under service tax, by way of which service tax is levied on 40% of the total taxable amount. Therefore, the effective rate of services becomes 5.6% (i.e. 40% of 14%) of the taxable amount.
Moreover, since service tax is levied on the gross amount charged from customer, the service charge is also included for computation of tax. This invariably increases the taxable amount.
Finally, there was this tax on sale of food items. With respect to restaurants, value added tax (VAT) is charged on the sale of food prepared at the restaurant. Since VAT is a state-specific tax, the applicable VAT rates for a particular item in one state may be different from another. Ideally, VAT should be charged on food items and beverages separately as per their respective prescribed rates. The VAT rates on food and beverages usually range between 5% and 20%, depending on the state you are feasting in. Most restaurants, however, club the price of food items and beverages and charge VAT at a flat rate on the single consolidated amount, which could be at a rate higher than that applicable separately on individual items. The consumer is helpless, since trying to calculate the VAT charges separately is a humongous task, which even if done, the restaurant management is least likely to take kindly.
Therefore, in addition to the amount we pay for the dishes which we order at a restaurant, we also pay for service charge, service tax and VAT.
After decoding the restaurant bill, I wanted to figure out the invoicing done by home deliveries and takeaway joints.
It is important to note that no service tax is applicable as there is an absence of an element of services. However, it is noticed that most restaurants and eating joints charge service tax to customers against home delivery or takeaways, primarily to safeguard themselves from potential litigation or due to ignorance.
So, in a nutshell, it is desired that the service charge be removed and customers allowed to pay tip as per their discretion. Also, home delivery and takeaways should not charge service tax. This, in itself, will substantially reduce your restaurant bills.
But the story does not end here. There is a new indirect tax regime almost knocking our doors—GST—which is expected to be rolled out on April 1, 2016. GST is a much-awaited comprehensive tax levy on manufacture, sale and consumption of goods and services, which shall replace the existing indirect tax regime. Under the GST regime, a majority of indirect taxes (such as service tax, VAT, etc) would be subsumed.
With respect to restaurant charges, instead of levying service tax and VAT—as is currently imposed—a single consolidated rate of tax (expected to be around 20%) shall be levied on the invoice amount. However, if service charges are still levied by restaurants, the GST will be applied on the service charge component also.
By charging a mandatory 4% to 20% service charge, restaurants are not only making themselves anti-customer friendly, but are also diverting the customers to home deliveries or takeaways.
(With inputs from Somya Gupta, associate, Indirect Tax, PwC)
The author is partner, Indirect Tax, PwC