Decoding your restaurant bill: Service charge, service tax and VAT Decoding your restaurant bill: Service charge, service tax and VAT Chartered Accountant CA ICAI Chartered Accountants CA ICAI CAinINDIA ICAI Announcements Accounting Standards CA News ICAI Students ICAI Members Case Laws CPT IPCC Final ICAI Course CA Course ICAI Forum CA Question Papers ICAI Study Material

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Decoding your restaurant bill: Service charge, service tax and VAT

May, 05th 2015
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 12.36 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 4.94 percent (i.e. 12.36 percent of 40 percent) of your total bill. Make sure that the restaurant does not charge you more than 4.96% (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 @ 12.36% on 416.00 51.41 VAT (assumed) @12.5 of subtotal i.e. 1040 130 Total amount to be paid (1000+40+51.41+130.00) 1221.41 So the next time you visit a restaurant, your bill will surely make more sense to you. Keep dining and bon appetit?!