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How not to get confused between service tax and service charge
December, 15th 2015

We all love to visit restaurants. Love to have the delicious mouth watering food but what we forget is the amount being paid by us. Without understanding the difference between service tax and service charge we pay it whole heartedly.

But be aware of these hospitality lies that have been covering your eyes. Yes... Many of them are cheating you by levying unnecessary charge.

From now onwards, if you want to have dinner outside, do remember to have a closer look at the bill.

The government had recently modified service tax policy, which should ideally have cut down the overall food bill. But, to one’s surprise, the changes are not visible in the bill.

Generally, there are two types of taxes that is levied on your food bill, namely value added tax (VAT) and service tax, besides service charge.

According to a Finance Ministry notification, from June 1, 2015, restaurants that have air conditioner or central heating facility will attract service tax of 14 per cent. The tax will be applicable on 40 per cent of the total bill amount.

But,it is found that restaurants have been charging customers on the full value (total bill amount).

On July 14, the government of India made it clear that service charges which are collected and retained by the restaurant are not imposed from the government’s side. The only taxes that are imposed by the government are service tax and VAT (that also differs state-wise).

Have a look and know the difference between service tax and service charge so that you don’t get cheated:

Service tax

The most important thing about the service tax is that it is only charged on 40% of the total bill. Hence, if you have to pay the bill of Rs. 1000, the service tax that will be charged should be on Rs. 400 (which is 40% of 1000).

To make the things easier for themselves, the restaurants need to charge service tax on the total amount, therefore reducing the amount to only 5.6% of the bill.

It is charged by the restaurants for the services being offered. As there are no guidelines provided by the tax authority, they charge as they feel like. The charges may vary from 5% to 20% (depends restaurant to restaurant).

In some cases, the money from service charge is mutually shared among the waiters (staff) in the form of a tip; here you are not required to give tip to the waiter.

Note the difference between the two charges: Always remember that service tax is what you pay to the government and the correct amount that you have to pay is 5.6% of the total bill OR 14% on 40% of your total bill.

Ground Rule: If the menu states a service charge is added, then there is no question arguing it- you have to pay it. But you can put forth your question to the restaurant that if the charge is used as a tip mechanism or if it will be mutually shared by everyone in the restaurant.

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