Restaurant and hotel associations are seeking clarification from the central government after the apex direct taxes body, the Central Board of Direct Taxes (CBDT), asked its field officers to keep a tight vigil on restaurants for potential under-reporting or non-reporting of additional income collected in the name of service charge.

The CBDT issued the order earlier this week.

“We are definitely going to the government on this. The service charge levied is reflected in our accounts,” said Dilip Datwani, honorary secretary at Federation of Hotels and Restaurant Association of India (FHRAI).

Anjan Chatterjee, founder of Speciality Restaurants, which runs Mainland China and Oh! Calcutta, said they were surprised by the directive as there is already transparency in statements.

“All of us are planning to approach the government on this,” he said.

Restaurant owners said most of them pass on about 75% of the service charge collection to their staff while retaining 25% towards crockery, cutlery, and glassware (CCG) breakage charges, and that all this already reflects in their balance sheets and statements.

On an average, restaurants distribute 50-80% of the service charge collected to employees.

The rest of the amount is used to buy crockery and cutlery on which tax has already been paid to the government. So then it is not fair to tax this amount,” said Karan Tanna, founder of Yellow Tie Hospitality.

The CBDT has said wherever it is found that the service charge receipts have not been passed on to the staff or there is some under-reporting or non-reporting of receipts, it should be duly brought under the tax net.

The move came after concerns were raised by the consumer affairs ministry, which received several complaints about restaurants levying service charge.

Service charge is supposed to be in the nature of ‘tips’ for hotel or restaurant staff and is sought to be collected on their behalf.

But there have been reports of some restaurants and hotels not passing it to their staff. Service charge is not taxable and the amount of service charge levied is entirely at the discretion of restaurants and hotels. Usually, the rate is 10% and it is mentioned on the menu.