The tax department is planning to issue guidelines for restaurants in an attempt to rein in the levying of service charges arbitrarily, and at times even illegally, reported Hindustan Times.
Earlier this year, the government had clarified that service charge collected by restaurants is retained by the restaurants and that it is not the "service tax" imposed by the government.
While service charge is collected for the services provided to customers by the hotel/restaurant, service tax is levied by the government and is applicable only to restaurants or hotels which provide air-conditioning or central heating facilities. Service tax is applicable only on 40% of the total bill amount. At present, the service tax imposed by the government is 14 percent, but will go up to 14.5 percent from November 15, 2015.
A senior government official told HT that complaints had been raised about service charges levied in restaurants. "Customers do not know that they are not liable to pay tax on top of another tax or a service charge. It is wrong for restaurants to levy service tax on the VAT component or service tax on the service charge component. Charging 14% on the entire food and beverage bill is also wrong. The Centre will soon introduce guidelines spelling out the principles of service tax and explain where and how it must be charged," the official told the newspaper.
"There are chances that customers are being charged extra service tax on their restaurant bills. This is because the service tax of 14% is charged only on 40% of the total bill and not 100%. So the effective tax is 5.6%. The key point here is that service tax is charged only on services and not goods, namely, the food consumed," Anita Rastogi, partner, Indirect Tax at PricewaterhouseCoopers, told HT.
However, customs and excise departments officials say that once the Goods and Services tax (GST) comes into force, these issues will be taken care of, adds the report.
Correction: An earlier version of this story incorrectly mentioned that the service tax charged by the government is 12.36 %. The service tax levied is 14 %. It has been corrected.