Ambiguity remains over GST on service charge

The devil lies in the details and this could be true even in the case of restaurant bills. One such case is the applicability of tax on service charge and ambiguity remains on whether it can be taxed under Goods & Services Tax (GST) or not.

Technically GST can be levied on service charge, if it is part of the total bill, as rules make it clear that any fee or charge, until exempted, will be taxable. However, the problem is with the legal character of service charge.

The government has always maintained that it does not have any legal status and is purely voluntary in nature. This argument is contested by restaurants owners, who say that it is legal as it is mentioned along with the price list or in the menu.

Interestingly, many consumers confuse service charge as a tax and believe that the S in GST stands for the same. But, it is not so.

Seeking clarity on the issue, BusinessLine contacted officials in the Finance Ministry and found that there is ambiguity even among the officials. While one official said that to club service charge with food and beverage bill for calculation of GST is correct, another senior official said “service charge is not taxable.”

The problem crops up when some restaurants do not include service charge in the amount liable for GST. Given the situation, tax experts and restaurants feel a need for a circular clarifying the same.

On the other hand, the restaurant industry defines service charge as a fee that is levied over and above the price of the food and drink for the additional convenience of serving inside a restaurant. They also emphasise that it is an internationally accepted best practice. The amount collected is distributed among the staff of the restaurant.

Transaction value

According to GST law, the value of a supply of goods or services or both will be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply.

Pointing to this clause, Rahul Singh, President, National Restaurant Association of India (NRAI), said tax has to be levied on any supply of goods or services which will also include delivery charges, packing charges or services charges, if any.

“If you order from a food aggregator and if the packing and delivery charges are separate, then GST is payable on that, as well. Similarly, for online travel booking, if you are paying convenience fee to airlines, there is a GST on that fee as well,” he said.

Karan Tanna, Founder, Yellow Tie Hospitality, added, “Service charge is an income for restaurants, even though restaurants distribute part of it with the team members. For any income generated by restaurant or for that matter any business, GST has to be collected from the buyer as per government policy.”

According to MS Mani, Partner at Deloitte India, the transaction value definition in GST is wide enough to cover service charges. However, the larger issue of the legality of a mandatory service charges levied has to be addressed within the framework of the Consumer Protection laws.

Customer caution

So where does it leave the customer? A restaurant cannot force a customer to pay service charge. However, it would be best if the customer first checks the menu or looks for any notice about the service charge. If needed, ask the manager and if he insists, then the customer has the option to leave.

Or in case the restaurant has not put any notice or informed about service charge on the menu, then the customer should check the bill before paying. If service charge has been levied, the customer is within his/her right to ask the manager to deduct it as it is voluntary.

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