Next time you visit an air-conditioned restaurant make sure you do not pay service tax on packaged drinking water or other beverages that carry a printed maximum retail price (MRP). The Finance Ministry has issued a clarification on this.
Also, air-conditioned restaurants or fast-food outlets, such as McDonald’s or Pizza Hut, which provide takeaway services will not get service tax relief if such facilities are provided at the same shop where one can sit and eat or drink beverages. However, the Revenue Department has allowed these establishments the option of exemption.
“If goods are sold on MRP basis (fixed under the Legal Metrology Act), these have to be excluded from the total amount for the determination of value of the service portion,” the circular issued on Monday said. This means, if the MRP on a packaged water bottle is Rs 100 and the service charge is Rs 20, then the service tax cannot be calculated on Rs 120, but only on Rs 20.
According to the circular, “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.”
Also, the tax will be levied if services are provided by a hotel in areas that are not air-conditioned or centrally-heated, such as swimming pool or an open area attached to the restaurant.
Food joints and restaurants had sought this clarification as the indirect tax policy-making body, the Central Board of Excise and Customs, did not specify whether service tax would be levied only on food consumed in AC restaurants or also on food taken out.
The issue was raised after Finance Minister P. Chidambaram, in his Budget speech this year, brought all AC restaurants, whether or not they serve liquor, under the service tax net from April 1.
Most fast-food joints have air-conditioned dining space. Some of their outlets have dedicated counters outside the AC hall for takeaway orders. Since these do not use ACs, the orders should not be taxed. However, this is being flouted.
Service tax is calculated on 40 per cent of the total value of the order, which translates into an effective rate of taxation of 4.8 per cent plus education cess, against the general rate of 12 per cent plus service tax.