Sunday 12 October 2014

Decoding your Restaurant Bill

What tax do you pay for when you are dining out

Whenever you go to dine out in a restaurant, you pay different kinds of tax. Many people are unaware as to how taxes should be levied on them. These laws are simple, and are listed below for your reference:

Sample bill:

Amount (INR)
Total food bill
Service Charges @ 10%
Total amount

VAT @12.5%
On the meal+ Service Charges
Service tax @ 4.94%
On the meal+ Service Charges
Total amount to be paid
Food+Service Charge + VAT+Service Tax

Types of Tax:

1. Service Charge

Service Charge is charged by the Restaurant for their services. There is no guideline for this charge and  restaurants can apply any amount (usually varying from 5 to 20 percent) to you as service charge. Many places do not ask for this charge from you.

This amount is an equivalent to the tip that we usually pay. So, where the restaurant levies service charge from you, you should not feel bad about not tipping.

When you are ordering food, ideally the menu should mention the rate of service charges, otherwise you may ask the people about the rate.

For Example in the above bill, the first step that the restaurant takes is to levy service charge on the total amount of food that you have eaten.( 10% of food bill)

2. VAT

VAT or Value Added Tax is applied to any sale of an item. This tax amount goes to the State and the rate of such tax also differs in different states.Sometimes, the rate of VAT may be different for different food Items, like, alcoholic beverage and non Alcoholic beverage might have different rate of VAT. VAT is applied to the amount which is calculated after adding Service charge to the bill, even when a part of the bill is for service and another part for the items sold.

For Example in the above bill, VAT at the rate of 14.5% is applied to the total amount

3. Service Tax

While dining out, you pay an amount which is a composite charge for raw materials and the service and amenities you enjoy of the restaurant. Service tax is applicable presently in all the restaurants, which have an air-conditioned/centrally heated portion, regardless of whether you utilised that portion or not.

The service tax can be applied only on the services, but what you get in a restaurant are a composite of goods and services. So, the Central Government has regulated that the Service tax would be applicable to 40% of the total bill( In case of outdoor catering, the tax is to be applied on 60% of the total Bill). The rate of Service tax at present is 12.36%. This includes Education Cess. Therefore, the restaurant should charge you 12.36 % of 40 %, that is 4.94 % of the bill before adding the VAT amount.

As explained in the above bill, The Service tax is applied to the amount of 3300/-( inclusive of the food bill and the service charges) @ 4.94%. Therefore, it must be kept in mind that Service Tax should not be more than 5% of the bill before adding VAT.

There was a confusion earlier where many people believed that the Service tax which is to be applied is only on the service charge, but that is NOT true; according to Rule 2-C of Service Tax ( Determination of Value Rules), the amount on which the Service tax applies is Value of food Bill + Service Charge.

Apart from these some restaurants adopt the policy of adding a nominal charity amount to your bill. This is a voluntary amount and you are not obliged to pay for it.

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