Last updated: December 17th, 2019 5:18 PM

Service Tax for Restaurants

The services provided by a certain class of restaurants and food services providers are liable to pay service tax in India. Service tax is applicable for all restaurants, canteens, tea houses, cafes or foods services providers that have the facility of air-conditioning or centralized air-heating in any part of the establishment, during any time of the year. In this article, we look at the applicability of service tax for restaurants, canteens, cafes and other food service business.

Service Charge in Restaurant

Service charge is different from service tax levied by the Central Government. Service charge is an optional charge levied at the discretion of the restaurant management at a rate determined by the restaurant. Hence, the collection of service charge goes to the restaurant management and is not a statutory requirement.

VAT for Restaurant

VAT or Value Added Tax is levied by the State Government and the rate and applicability of VAT for restaurant varies from state to state. Under VAT regulations, the supply or service of foods and drinks for human consideration is considered to be a sale under VAT rules and VAT is applicable.

VAT is usually levied on the entire food bill without any exemption in most States. However, in the State of Uttarakhand, it was decided by the Courts that VAT is leviable on only 60% of the food bill as the balance 40% is deemed as a service tax and service tax is collected on 40% of the total food bill amount. Hence, until the implementation of Goods and Services Tax in India, the confusion and disputes relating to rate and applicability of VAT and Service Tax on Restaurants will continue.

Applicability of Service Tax for Restaurants

Service tax is applicable for all restaurants, eating joints or mess that have air conditioning or air heating facility in any part of the establishment at any time of the year. Hence, even restaurants that have part air-conditioned and part non-air-conditioned eating areas are liable to pay service on the entire services provided.

Service Tax Exemption for Restaurants

Restaurants, eating joint or a mess that DOES NOT have the facility of air-conditioning or central air-heating in ANY PART of the establishment, at any time of the year are exempt from service tax.

Also, air-conditioned or air-heated canteen maintained in a factory are exempt from service tax from 22nd October, 2013. However, this exemption is available only for canteens run in a factory and is not applicable for a office canteen facility. The key to distinction between an office canteen and factory canteen is the presence of manufacturing process.

Small service providers providing taxable services of less than Rs.10 lakhs in a year are exempt from service tax. Small service provider exemption is applicable for restaurants and any restaurants providing a taxable service of less than Rs.10 lakhs is exempt from service tax.

Restaurant Service Tax Rate

Service tax is leviable at the rate of 14% on 40% of the total bill amount, which excludes the VAT, if any charged  by the Restaurant. Food and beverages served at a place not in the restaurant and supplied in any other manners as a part of outdoor catering enjoy a service tax abatement of 60% of the total bill amount. However, hose restaurants enjoying the service tax abatement will not be eligible for CENVAT credit.