Eating out left a slightly bitter aftertaste after the levy of service tax on restaurants in May 2011.

Initially, it was restricted to restaurants which had air conditioning and licence to serve alcohol, but in July 2012 it was extended to services provided by restaurants.

From April 1, 2013, the tax net was widened to include all restaurants with air conditioning or central heating facility, even if they didn’t serve alcohol. Effectively, all quick-service restaurants and eating establishments now attract service tax.

Payable on 40 per cent of the total invoice value excluding sales tax/ VAT, the effective service tax rate is 4.94 per cent on the invoice value.

MRP effect

The Finance Ministry recently issued a circular clarifying that service tax will not be levied on goods sold at MRP (maximum retail price). So there is no service tax on bottled water, soft drinks, juices, chips sold at MRP. Say the bill is for Rs 150, including Rs 20 for mineral water sold at MRP, then service tax should be paid on 40 per cent of Rs 130.

The circular also clarifies that where a complex has separate eating sections, namely air conditioned and non-air conditioned, but a common kitchen, then no service tax applies on food served in the non-air conditioned section. However, the restaurant should clearly demarcate them under different names. This could pose a challenge to restaurants that offer indoor and open-air seating under the same name.

There is no clarity on service tax for a takeaway facility. Previously, under the positive list regime, it was clarified that there was no service tax on food pick-up and home delivery facilities.

The Ministry also explained that service tax would apply on food served by hotels in open areas such as the poolside and rooftop. However, there is no such clarity for in-room dining.

Office canteen services

While service tax now applies to food served in a mess with air conditioning facility, the meaning and scope of “mess” have not been defined. Accordingly, canteens in offices serving employees food against a consideration may now attract service tax.

Recently, an amendment in the law exempts service tax on food or beverages served by a canteen in a factory that is covered by the Factories Act, 1948. Service tax would apply where the employer charges a consideration for food served in the canteens of corporate/ administrative offices, service-based companies and others that cannot be considered a “factory”.

This adds to the cost of dining even in workplaces, which are practically not restaurants.

Moreover, lack of clarity on credit availability is impacting the restaurant business.

The law restricts credit availability only against purchase of inputs that are classifiable under Chapter 1-22 of the excise tariff, which primarily comprises food products and beverages (processed or naturally obtained); there are no constraints on credit availability against input services and capital goods.

However, the Ministry has stated in a circular that sale of food amounts to clearance of exempt goods and, therefore, no credit is available for input services attributable to such exempt goods.

It remains unclear how the value of exempted goods should be computed to arrive at the proportionate value for credit.

According to the Credit Rules, an assessee can obtain credit against common input services either through proportionate reversal of credit, or payment up to 6 per cent of the value of exempted goods/ services.

In the case of restaurants, service tax applies on 40 per cent of the total invoice value.

Therefore, restaurants can obtain credit to the extent of 40 per cent of total service tax paid on obtaining input services.

Accordingly, if a restaurant pays service tax of Rs 100 on input services such as rent, security and so on, it can get credit of Rs 40 only.

credit and exemption

Alternatively, 6 per cent of value of exempted goods/ services can be paid. As serving food in a restaurant is considered a deemed sale, and food sold at a restaurant is exempt from excise, should the entire value of food be exempt for computing credit?

Owing to these anomalies, restaurant operators are uncertain about the tax position to be adopted for obtaining credits; non-availability of credits can increase the cost of running a restaurant.

The Ministry should clarify at the earliest if it is to avert litigations at a later date.

(Saloni Roy is Senior Director and Bhavesh Ahuja is Deputy Manager, Deloitte Touche Tohmatsu India Pvt Ltd)