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Can a restaurant charge service tax even if no service is being done?

Why are we asked to pay service tax for home-deliveries and takeawaysImage for representation
news Tuesday, September 15, 2015 - 15:47

While getting your favourite pizza home-delivered or making a quick stop at the restaurant to pick up that delectable curry, do you ever check the amount you paid in taxes? Ever wondered if it is legal for restaurants to charge service tax for home-delivery and takeaways?

In response to a query sought by a local restaurant, the office of the Deputy Commissioner of Central Excise and Service Tax Division (Chandigarh) last month clarified that service tax would not be applicable for transactions involving pick-ups and home deliveries.

"It is clarified that in case of a transaction involving pick-up or the home deliveries of the food sold by the restaurant, the dominant nature of the transaction is that of sale and not service as the food is not served at the restaurant and further no other element of service which is offered at the restaurants, be it ambiance, live entertainment, if any, air conditioning, or personalised hospitality is offered. The service tax can be levied if there's an element of 'service' which would typically the case where food is served in restaurant. The above transaction is not liable to service tax, being sale in nature, only if, no amount is charged for such free delivery of food,” the letter from the DC read.

Come to think of it, it is quite obvious that service tax need not be paid by customers when, in fact, no service is being done. Yet, it is a common, unquestioned practice across the country that restaurants charge service tax even for deliveries and takeaways.

There three common charges levied by hotels and restaurants are,

Service charge, which is collected for the services provided to customers by the hotel/restaurant

Service tax, which 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. This is 12.36 percent on 40 % of the total bill or 4.94% on the total bill.

Value Added Tax (VAT) is a form of consumption tax applicable only to food items that are prepared in restaurant and value is added to the product before serving to it to the customer. 

So why do some restaurants charge service tax, even though they aren't technically providing any service, and the tax will ultimately go to the government?

Sunil Gabhawalla, chartered accountant and indirect tax expert explained to The Times of India, "Though not legally required to, some restaurants do levy service tax, even on takeaways or home deliveries, for various reasons. Unless the restaurant has a strong back-end record maintenance process, it becomes practically difficult to substantiate during an indirect tax audit, which portion of the revenue earned was via takeaways. The risk of litigation tempts some restaurants to levy service tax even when the meal is not served in-house. Also, in cases where restaurants levy service tax they do get a Cenvat credit, which they can use to offset indirect taxes they have to pay, thereby benefitting to an extent, in the process." 

The TOI report states that following the clarification issued by the DC's office the National Restaurant Association of India (NRAI) sought a written clarification on the same from the finance ministry.

While a common practice with some restaurants and food outlets, what seems to be lacking is consumer awareness around the issue.

Experts feel that there is a need for the government to clarify which are the elements which constitute a 'service'.

“Your milkman delivers you milk every day. Will the government put that under the ambit of service tax as well? Yes, they do charge for delivery but there is no element of service included. I don’t see how just delivering a product constitutes a service,” said a professional who has worked in the space of consumer law and safety issues for several years now. 

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