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Clarifications on Service Tax on Restaurant Services w.e.f. July 2012

by on October 7, 2013

New change in service tax provisions related to restaurants services is effective from 01-04-2013 and the ambit will cover all food stores, eating joints, dhabba or any spectrum in the nature of restaurants etc. provided they have AC or central air-hitting anywhere in their establishment. Read our full article on this subject matter at –http://aviratshiksha.wordpress.com/2013/03/26/service-tax-on-restaurant-services-from-01-04-2013/.

Since amendment of service tax implications on restaurant services, the confusion prevails within the restaurant industries on many aspects. To clarify some of the issues, Circular 173/8/2013 – ST has been issued on 07/10/2013 and this article covers the detailed analysis of issues clarified.

The new Circular 173/8/2013 is nothing but re-introduction of Circular No. 139/8/2011-TRU earlier issued on 10th May 2011 which was issued to support the levy of service tax started on restaurant services from 01-05-2011.

Issue 1: In a complex where air conditioned as well as non-air conditioned restaurants are operational but food is sourced from the common kitchen, will service tax arise in the non-air conditioned restaurant?

Clarification: Services provided in relation to serving of food or beverages by a restaurant, eating joint or mess, having the facility of air conditioning or central air heating in any part of the establishment, at any time during the year (hereinafter referred as ‘specified restaurant’) attracts service tax. In a complex, if there is more than one restaurant, which are clearly demarcated and separately named but food is sourced from a common kitchen, only the service provided in the specified restaurant is liable to service tax and service provided in a non air-conditioned or non centrally air- heated restaurant will not be liable to service tax. In such cases, service provided in the non air-conditioned / non-centrally air-heated restaurant will be treated as exempted service and credit entitlement will be as per the Cenvat Credit Rules.

Author’s comments: Simply speaking, just because the establishment is joined with a taxable restaurant does not make an otherwise non-taxable restaurant chargeable to service tax.

The boundaries and name of the taxable and exempt restaurants shall be clearly segregated to avoid any confusion.

Issue 2: In a hotel, if services are provided by a specified restaurant in other areas e.g. swimming pool or an open area attached to the restaurant, will service tax arise?

Clarification: Yes. Services provided by specified (i.e. only which are covered as taxable) restaurant in other areas of the hotel are liable to service tax.

Author’s comments: The other areas where food is provided is considered as an extension of the restaurant. This is to note that the extension is possible only when the restaurant is taxable at first place meaning by if a non-AC restaurant or where no air-hitting machine is anywhere installed in the restaurant if provided food outside the hotel or at other premises the service tax is not payable by such restaurants.

This clarification will cover situations where restaurants are providing foods outside restaurants e.g. McDonalds, Pizza Hut, Dominos etc. and service tax shall be paid by them. Need not to say they are entitled to get the abatement and rate of service tax shall be 4.944%.

However, take away services to home again remains under doubt. From author’s point of view, take away services to home shall not be considered as an extension of restaurants because the final consumption of food takes place at home and not in restaurant or an extension (nearest vicinity or joint) of restaurant.

In other words, what is NOT a restaurant can not be otherwise called a restaurant by way of calling it an extension by any stretch of imagination. What is the meaning of defining a taxable restaurant then?

Issue 3: Whether service tax is leviable on goods sold on MRP basis across the counter as part of the Bill/invoice.

Clarification: If goods are sold on MRP basis (fixed under the Legal Metrology Act) they have to be excluded from total amount for the determination of value of service portion.

Author’s comments: For example, if a restaurant provides pre-packed branded food or other eating items e.g. crisp, biscuits, water bottle etc. to their customers and charges these food items on their bills to recover the costs then they are not taxable to service tax because they are chargeable to excise on MRP basis. To further clarify, the service charges charged for such consumption of food will be taxable but not the cost-to-cost billing done to customers.

This means, if the MRP on a packaged crisp is Rs 15 and the service charge is Rs 5, then the service tax cannot be calculated on Rs 20, but only on Rs 5.

CA GAUTAM JOSHI

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