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Taxation issues on restaurant bill

Sandeep Kumar Sahu
14/02/2017 0 0

Taxation system in Restaurant

It is well known by the consumer that restaurant normally charge for both component ‘Goods and Services’. For goods component, value added tax are charged at prescribed rate by the relevant state authority, whereas service part are concerned, service tax are charged by the Central Government at the rate applicable at relevant period of time.

Constitutional provision:

Certain services have been specifically provided as a taxable and declared service under section 66E of the Finance Act 1994. As per section 66E (i) of the Finance Act 1994 ‘service portion in an activity wherein goods, being food or any other article of human consumption or any drink is supplied any manner as a part of the activity’ is specified as declared service.

In terms of Article 366(29A) of the Constitution of India, sale includes ‘supply by way of or as part of any service or in any other manner whatsoever, of goods, being food or other article of for human consumption or any drink (whether or not intoxicating), where such supply or service is for cash, deferred payment or other valuable consideration’.

As per Rule 2C of Service Tax (Determination of value) Rules 2006, “service portion in an activity wherein goods, being food or any other article of human consumption or any drink is supplied in any manner is 40% of Gross amount charged. Means out of total value of bill charged in any restaurant, only 40% portion is chargeable for service tax. The remaining 60% portion is considered as sales portion and accordingly value added tax are leviable on the same at prescribed rate by respective state.

But, in practical scenario, restaurant owners are charging VAT on entire bill payable by the consumer. This practice is unconstitutional and against the soul and objective of Article 366(29A) of Constitution of India. Collecting VAT on service component of restaurant bill is not an ethical practice. Service tax is collected on the value of taxable services provided in the taxable territory. And VAT is collected on the value of sales involved in the execution of sales activity. No service tax shall be charged on the sales portion, similarly VAT is also not chargeable on service portion.

Example showing tax amount chargeable in Restaurant

Invoice Bill

Particulars                                                                           Amount (Rs.)

Value of consumable items                                         25,000

+ Service Tax @ 5.80%                                                1,450

(14.5 x 40% = 5.8%)

+VAT @ 7.50%                                                            1,875

(12.5 X 60% = 7.5%)

TOTAL AMOUNT                                                            28,325

But in practical what are chargeable amount in a restaurant are shown as:

Particulars                                                                           Amount (Rs.)

Value of consumable items                                            25,000

+ Service Tax @ 5.80%                                                   1,450

(14.5 x 40% = 5.8%)

+VAT @ 12.50%                                                             3,125

 TOTAL AMOUNT                                                          29,575

Accordingly a customer is paying Rs. 1,250 (Rs. 29,575- Rs. 28,325) more than actual and genuine payment. Restaurant owners are charging more because they are keeping their hand safe by deducting higher amount and department is silent in this regard. However, this practice is not tenable as per the provisions available in law.


Our Constitution has specified that sales tax applicable on sale or purchase of goods is on “transfer of property in goods. It means sales tax on sale or purchase of goods is on “transfer of property of non- goods is not subject to tax. In case of bundled service where in material and service both involved in one transaction including work contract, VAT shall not be chargeable on non- goods part.

Accordingly all the states VAT law have to follow the provision of Article 366 (29A) of the constitution and state law, rule, circular and notification should correspond according to such article. Any state law, rule, notification and circular against the objective of above mentioned Article 366 (29A) shall be not valid and be void.

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