Understanding Service Tax and VAT

Let's understand the components that inflate your restaurant bills ...

Not everyone is aware about Service Tax and VAT taxation details. So let's demystify these charges and understand the components that inflate your restaurant bills.

Service charge:

Service charge is collected by the restaurant for rendering its service to you. It is not a tax and is not levied by the government but purely charged by the restaurants. They are free to charge any amount as there are no guidelines, but it usually varies from 4 to 10 percent. It is corresponding to the tip which you would typically give waiters for a good service, so there is no need to pay a separate tip. However, one has to pay this amount regardless of not being happy with the service if the menu card mentions the charges clearly. But you can always question the charges if the menu card doesn’t mention it.

Service Tax:

Service tax is different from the service charges mentioned above - it is a tax levied by the government. This is 14.5 percent and payable on 40 percent of your total bill, which includes food, drinks, service charge and served in an air-conditioned restaurant only. In simple words, service tax would be 5.8 percent (i.e. 14.5 percent of 40 percent) of your total bill. Make sure that the restaurant does not charge you more than 5.8% (of the total bill) as service tax and that it is an AC restaurant.

VAT (Value Added Tax):

VAT is only applicable on food items that are prepared in the restaurant as they add value before serving it to you. So make sure that you are not charged VAT on packaged food items or water bottles. VAT rates are different for alcoholic beverages and other food items and is applicable only on your final bill. Also, rate of VAT tax differs from 5 percent to 20 percent depending upon the state you are dining in, because it is levied and controlled by each state separately.

Let’s understand this with an example of a restaurant bill for an amount of Rs 1000/-.

Items Amount:

Your Total Food Bill 1000
Service charge (assuming 4 percent) 40
Sub Total 1040
Service Tax to be levied on (40% of subtotal i.e. 1040) 416
Service tax @ 14.5% on 416.00 = 60
VAT (assumed) @12.5 of subtotal i.e. 1040= 130

Total amount to be paid (1000+40+60+130.00) 1230.00

So the next time you visit a restaurant, your bill will surely make more sense to you. Keep dining and bon appetite! more  

View all 36 comments Below 36 comments
How to calculate The newly introduced Krishi Kalyan Cess. Eg: Invoice Amount Rs 10000.00 Service Tax @ 14 % Rs 1400.00 Swachha Bharat Cess @ .5 % Rs 50.00 Krishi Kalyan Cess @ .5 % Rs 50.00 Total Rs 11500.00 Is the above Calculation correct ? Please let me know. Regards sandhya more  
SP sir, still i am unable to understand , do u mean only the last quarter starting from jan to march more  
This reply is in relation to the query raised by Subramanian Iyer. Please note that once the threshold limit of 10 lacs ic crossed, depending upon the time of the year the limit is reached , Service Tax is liable. For e.g. if you happen to cross the limit let us say in the month of October or earlier, entire amount of 10 lacs becomes liable for Service Tax. Whereas, if you cross the limit in the last quarter , only the differential amount is liable. Thereafter irrespective of whether you cross the limit of 10 lacs or not, service tax is applicable on the entire billing. Hope the position is clarified. more  
sir, need a clarification.... service tax is applicable to be billed only after 10lakhs if we exceed the limit of 10 LAKHS... or is it that the whole of 10 lakhs we need to bill service tax... can anyone in this line clarify??? more  
Mr.Sharma is absolutely correct. Vat is liable only on sales and Service Charges do not form part of sale. more  
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