 "Check your restaurant bill before you pay")
When Pune-based Amol Nadhe recently went out for lunch with his family, his bill had several charges and taxes, in addition to that for food. There was a value-added tax (VAT) on food at 12.5 per cent, service tax at 5.6 per cent, a service charge at 5 per cent and a service tax on the service charge at 14 per cent.
"I could not understand why I was charged service tax twice. When I asked the manager, he had no clue and spoke to someone in Delhi but all they could tell me was that it was the hotel's policy. I spent half an hour speaking to the hotel staff about this and finally paid the bill," says Nadhe.
How many of us actually check the restaurant bill in detail and try to understand what the various charges and taxes are? Most of us would perhaps only check if the amount mentioned is correct and if we have been charged for items we did not order. If that is in order, we usually pay the bill and maybe also include a tip. But, are we being over-charged?
Typically, in a restaurant bill, there are two tax components. One is service tax and the other is VAT.
Service tax is charged at 14 per cent. It is for the ambience provided by the restaurant - decor, seating arrangements, background music, etc. It is charged for the service provided by the waiters and staff of the hotel, such as setting the table, serving the food, clearing the table, etc.
VAT is charged for the food prepared and sold by the restaurant. It varies from state to state and can be between four and 12 per cent.
Maximum retail price
If the restaurant serves you any packaged food or drink, such as bottled water, it will charge you the MRP on that. It is not supposed to charge you additional VAT on the packaged product because the VAT is embedded in the MRP.
Service charge
Some restaurants have a separate service charge, over and above the bill for food and beverages. This is supposed to be in lieu of a tip, which customers pay in appreciation for the good service.
Service tax, VAT calculations
Since a restaurant bill is an aggregate of both goods (food and beverages) and service elements, service tax is levied on a presumptive basis, says Debasis Ghosh, Director, Deloitte Haskins and Sells. The presumption is that the service element accounts for 40 per cent of the total bill and service tax is charged on the 40 per cent. VAT is levied on the remaining 60 per cent, presumed to be the goods element, that is food and beverage. So, service tax actually works out to only 5.6 per cent of the total bill, that is, 14 per cent of the 40 per cent.
One way restaurants might be over-charging is by charging service tax at 14 per cent on the entire bill amount, instead of doing so only on 40 per cent so as to make the effective rate 5.6 per cent. "If the restaurant is indeed charging service tax at 14 per cent on the entire amount, rather than 5.6 per cent, the amount collected from customers should be paid to the government," says Anita Rastogi, partner, PwC India.
Another error could be in the case of VAT. Restaurants are not supposed to charge VAT on packaged food or drinks, like bottled water. VAT should be charged only on food prepared by the restaurant. Products like bottled water are sold at the MRP. There is no additional VAT, since it is embedded in the MRP. "There could be situations of over-charging when restaurants include the bottled water sold in their bill and charge VAT over and above that. Customers might miss this item," adds Rastogi.
Some restaurant charge a separate service charge, over and above the bill. The question that arises is whether the service tax should be 14 per cent of the service charge or whether this service charge is part of the 40 per cent of the bill that is assumed to be service. This is open to interpretation. Some restaurants charge service tax on service, some don't.
"If the restaurant is charging an additional service charge, technically, they can charge 14 per cent service tax on that as well. Service charge is income for the restaurant," explains Ghosh.
What you can do
If you find a restaurant is overcharging, that is, charging 14 per cent service tax on the entire amount, you can point it out to the tax department.
"But, the chances are that the only response you get from the authorities is that they will issue a notice to the restaurant, to check whether the entire amount so collected is paid to them. This is because any amount collected as tax from customers needs to be remitted to the government. If a restaurant is charging service tax on the full 100 per cent of the bill but paying tax only on 40 per cent, it can be prosecuted," says Rastogi.
In the case of service charge, you do have a choice of not paying if you are unhappy with the service. However, the response often is that it is the restaurant's policy. "If the restaurant does not take a service charge, chances are that the additional amount will be added to the cost of the food and beverages and the whole bill will be hiked," says Ghosh.
One area charge you should refuse to pay is service tax on home delivery, say Rastogi and Ghosh. Since there is no service element, restaurants are not supposed to charge this. They may only charge VAT.
Since only air-conditioned restaurants are liable to pay service tax, there were instances where five-star hotels would charge service tax in their AC restaurants but not in their poolside restaurant. To avoid this anomaly, the government has clarified that any restaurant with even one A/C or central heating should pay service tax. So, the next time you eat out, check your bill carefully. If you are being over-charged, bring it to the notice of the staff and, if required, the tax authorities.
"I could not understand why I was charged service tax twice. When I asked the manager, he had no clue and spoke to someone in Delhi but all they could tell me was that it was the hotel's policy. I spent half an hour speaking to the hotel staff about this and finally paid the bill," says Nadhe.
How many of us actually check the restaurant bill in detail and try to understand what the various charges and taxes are? Most of us would perhaps only check if the amount mentioned is correct and if we have been charged for items we did not order. If that is in order, we usually pay the bill and maybe also include a tip. But, are we being over-charged?
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In the case of Nadhe's bill, the tax rates charged by the restaurant were correct. However, why was he charged a service charge in addition to a service tax?
Typically, in a restaurant bill, there are two tax components. One is service tax and the other is VAT.
Service tax is charged at 14 per cent. It is for the ambience provided by the restaurant - decor, seating arrangements, background music, etc. It is charged for the service provided by the waiters and staff of the hotel, such as setting the table, serving the food, clearing the table, etc.
VAT is charged for the food prepared and sold by the restaurant. It varies from state to state and can be between four and 12 per cent.
Maximum retail price
If the restaurant serves you any packaged food or drink, such as bottled water, it will charge you the MRP on that. It is not supposed to charge you additional VAT on the packaged product because the VAT is embedded in the MRP.
Service charge
Some restaurants have a separate service charge, over and above the bill for food and beverages. This is supposed to be in lieu of a tip, which customers pay in appreciation for the good service.
Service tax, VAT calculations
Since a restaurant bill is an aggregate of both goods (food and beverages) and service elements, service tax is levied on a presumptive basis, says Debasis Ghosh, Director, Deloitte Haskins and Sells. The presumption is that the service element accounts for 40 per cent of the total bill and service tax is charged on the 40 per cent. VAT is levied on the remaining 60 per cent, presumed to be the goods element, that is food and beverage. So, service tax actually works out to only 5.6 per cent of the total bill, that is, 14 per cent of the 40 per cent.
One way restaurants might be over-charging is by charging service tax at 14 per cent on the entire bill amount, instead of doing so only on 40 per cent so as to make the effective rate 5.6 per cent. "If the restaurant is indeed charging service tax at 14 per cent on the entire amount, rather than 5.6 per cent, the amount collected from customers should be paid to the government," says Anita Rastogi, partner, PwC India.
Another error could be in the case of VAT. Restaurants are not supposed to charge VAT on packaged food or drinks, like bottled water. VAT should be charged only on food prepared by the restaurant. Products like bottled water are sold at the MRP. There is no additional VAT, since it is embedded in the MRP. "There could be situations of over-charging when restaurants include the bottled water sold in their bill and charge VAT over and above that. Customers might miss this item," adds Rastogi.
Some restaurant charge a separate service charge, over and above the bill. The question that arises is whether the service tax should be 14 per cent of the service charge or whether this service charge is part of the 40 per cent of the bill that is assumed to be service. This is open to interpretation. Some restaurants charge service tax on service, some don't.
"If the restaurant is charging an additional service charge, technically, they can charge 14 per cent service tax on that as well. Service charge is income for the restaurant," explains Ghosh.
What you can do
If you find a restaurant is overcharging, that is, charging 14 per cent service tax on the entire amount, you can point it out to the tax department.
"But, the chances are that the only response you get from the authorities is that they will issue a notice to the restaurant, to check whether the entire amount so collected is paid to them. This is because any amount collected as tax from customers needs to be remitted to the government. If a restaurant is charging service tax on the full 100 per cent of the bill but paying tax only on 40 per cent, it can be prosecuted," says Rastogi.
In the case of service charge, you do have a choice of not paying if you are unhappy with the service. However, the response often is that it is the restaurant's policy. "If the restaurant does not take a service charge, chances are that the additional amount will be added to the cost of the food and beverages and the whole bill will be hiked," says Ghosh.
One area charge you should refuse to pay is service tax on home delivery, say Rastogi and Ghosh. Since there is no service element, restaurants are not supposed to charge this. They may only charge VAT.
Since only air-conditioned restaurants are liable to pay service tax, there were instances where five-star hotels would charge service tax in their AC restaurants but not in their poolside restaurant. To avoid this anomaly, the government has clarified that any restaurant with even one A/C or central heating should pay service tax. So, the next time you eat out, check your bill carefully. If you are being over-charged, bring it to the notice of the staff and, if required, the tax authorities.