Basis of Levy of Service Tax
First let us understand that the each and every eating house or restaurant is not liable to collect service tax from its customers. It is only the restaurants/eating houses serving food or beverage, which have air-conditioning or central air-heating facility in any part of the establishment, who are liable to collect service tax from customers and pay it to the government. It is not necessary that the area where the food or beverage is served should be air-conditioned. It is sufficient that any part of the restaurant or hotel is air-conditioned for the entire establishment to come under the charge of service tax. Please note that service tax is a central levy and the rate of tax is uniform throughout the country.
Now let us evaluate the perception that service tax is collectible only on the service charge collected by the restaurant ? Service charges are not collected by all the restaurants but only a few collect certain percentage of the bill amount as service charge. This is supposed to be tip and is supposed to be shared by the staff.
Moreover service charges is not a tax collected on behalf of the government and thus is not a government levy. Though the service charge is supposed to be for services but levy of service tax is not linked to service charge only. For the purpose of service tax the law presumes that conversion of raw food items into final eatables as well as serving of the same to the customer constitute service. However since the whole of the invoice amount can be attributed towards either cost of the raw materials or cost of the service, service tax cannot be levied on whole amount of the bill.
Moreover it is extremely difficult to segregate the service component and material component for the restaurant/eating house, without inviting further dispute and litigation, the service tax laws presumes a certain portion of the final invoice as the cost of the material and the balance as charges for the services. In taxation parlance this is called abatement. In case of restaurant 40% of the value of the invoice is presumed to be service component and the service tax is levied on 40% of the final value of the invoice. With the present rate of service tax being 14.50% and the same being leviable only on 40% of the value of the invoice, the effective rate of service tax shall be 5.80%of the gross amount of the invoice including the amount of service charges levied.
Basis of Levy of VAT
The rates of VAT is not same across the country as unlike service tax, the VAT is a state subject and each of the states has its own rate of VAT applicable on food and beverage serviced by the restaurants. So the invoices of restaurants have been subjected to double taxation. The same value of the invoice is subjected to VAT and then 40% of the value of the invoice suffers service tax as well.
However In a recent decision Hon’ble Uttarakhand High Court in the case of M/s Valley Hotels & Resorts vs. The Commissioner, Commercial Tax, Dehradun, decided on 10th April 2014 has held that the component which is subjected to service tax can not again suffer the levy of VAT. So as per the decision of the Uttrakhand High court the 60% of the value of the invoice is subject to VAT and service tax can be collected on the balance 40% of the value of the restaurant bill.
Since both the levies are separate, service tax and VAT needs to be calculated on the amount of the invoice only and neither of these shall be included for calculation of the other. . However in case the VAT is not shown separately in the invoice and is included in the rate of the dish, the service tax shall be calculated on the gross amount of the invoice. This happens when the restaurant has opted for payment of VAT under composition under which the VAT is payable on the gross amount of the invoice.
From the above discussion I am sure the readers are clear that the service tax is payable not only on the service charges but is also collectible on 40% of the value of the invoice. So the restaurant can levy service tax as well as VAT on the same amount.
P.S. This article has been taken from moneycontrol.com