Taxes You Pay When You Eat Out at a Restaurant

Have you ever gone through the bill in detail when you make the payment in restaurants? If you have, you will probably agree that there are a lot of charges and taxes which are levied.

So, that you don’t end up making excess payment, do go through the following article which will help you to analyze the various taxes charged in restaurants, and understand all Taxes You Pay When You downloadEat Out at a Restaurant

You will find the following charges levied on your bill amount:

  • Service charge
  • VAT
  • Service tax.

Now what is service charge? In a restaurant you are provided services such as you are being served food at your table. So, the restaurant owners collect a payment for the services rendered. This is not levied by the government. You are required to make this payment if the same is indicated in your bill. The amount is on the discretion of the owners though it generally is in the range of 5% to 10%. You can say that it is a sort of mandatory tip which you are required to pay!

Now, as you know VAT is charged on sale of goods. So, in a restaurant is there any sale of goods? Obviously yes! You are being sold food items, don’t you agree? So there is a levy of VAT in restaurants.

Now, coming to service tax, there are a lot of amenities and hospitality services in a restaurant. Now the amount that is billed to you is not just a cost of food items but also a cost of services. It is a composite charge. Logically, if services are rendered, Central Government collects service tax on the services rendered.

As per a recent amendment, service tax is charged if the restaurants are air conditioned. So, if the restaurants are not air conditioned no service tax is charged! Earlier there was a requirement that apart from being air conditioned the restaurants should also have a bar, but this condition has been done away with. Consequently, even if there is no bar, still service tax is chargeable if the restaurant is air conditioned.

Now let us understand that on what amount is service tax levied. Well, as we have just seen the bill amount is a composite charge for food items and services, so it would be wrong to charge service tax on whole amount.  However, bifurcation of the bill into the sale and service part is almost impossible. So, what the government has done is allowed abatement. As a result, service tax is charged on only 40% of the bill amount (including service charge but excluding VAT). In other words, 4.944% service tax (12.36% x 40%) on restaurant is chargeable.

Lets understand this with the help of a hypothetical example:

Total Bill 2000
Service charge 200
Total 2200
VAT @ 14.5% 319
Total amount 2519
Service Tax (12.36% of 40% of 2200) 108.77
Total Amount 2627.77

To conclude, there is an element of sale and service both in case of restaurants. As a consequence, both service tax and VAT is charged in restaurants.

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