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Difference between Service tax and Service charge


Do you know difference between service tax and service charge charged by hotels and restaurants , let us check it out.

1.Service Tax

Service tax is charged by government for the services provided by the restaurant along with food and beverages. Services include use of restaurant space, air conditioning, cutlery, service provided by hotel staff etc. Service tax charged by restaurants is payed by them to the government.

14% Service tax plus 0.5% Swachh Bharat Cess and is applicable on 40% of total bill.

From June 1 2016, additional Krishi Kalyan cess of 0.5% will be applicable on service tax. Thus you have to pay 6% (40% x 15%) service tax on your total hotel bill.

Applicability of service is as follows

  • Service tax is applicable on food bill in restaurants having the facility of air-conditioning or central air-heating in any part of the establishment, at any time during the year.

  • Service tax is not applicable if food items are sold at MRP or through home delivery and food pick.

  • Service tax is not applicable on VAT (valued added tax) part of food bill.

  • If a complex has both air-conditioned and non-air conditioned restaurant and serviced by common kitchen, then service tax will not be applicable in non-air-conditioned if both restaurants have different names. Area of both restaurants should also be clearly demarcated to qualify for exemption.

  • Service tax is payable on 60% of total bill if food and beverages are provided as part of outdoor catering.

2.Service charge

Service charge is kind of compulsory tip charged by some restaurants and hotels in the range of 5-20% of the bill. Service charge collected by restaurants is supposed to be distributed among the restaurant staff. Amount to be charged as service charge is not regulated, so service charge varies from one restaurant to another.

Restaurants usually avoid displaying the service charge in their menu or anywhere openly in the restaurant, finally when bill arrives one gets surprised to see the addition of hefty service charge.Service charge is a debatable point as one has to pay it no matter how good or bad is the restaurant service. Even if we pay the service charge there is no guarantee whether it is paid to restaurant staff or its goes into restaurant owners pocket.

Charging service charge is a global practice and charging it may not be illegal, but paying it should not be made mandatory. Payment of service charge and its amount should be left at discretion of the customer. In Jan 2017, Department of consumer affairs in India issued a clarification that payment of service charge is voluntary and customer can refuse to pay the same if he/she is dissatisfied with the service.

Restaurants should also clearly mention the service charge percentage in their menu. One should not pay any tip if service charge is included in your bill

In addition to service tax and service charge one has to pay 12.5% VAT which is charged on food bill.

Example: How service charge and service tax is add to your bill.

  • Food Bill= Rs 2000

  • Service Charge (assumed 10%)= Rs 200

  • VAT (12.5%)= Rs 275

  • Service Tax(5.8%)= Rs 127.6

  • Amount to be payed by customer = 2000 +200 +275 +132

= Rs 2607

In short you pay Rs 607 in form of service tax,service charge and VAT on food bill of Rs 2000.Thus your food bill is inflated by about 30% in this manner.

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