Not lovin’ it

Rakesh Nangia Nitish Sharma | Updated on March 12, 2018

Multiple taxes make dining out bitter

In India, lawmakers think common people eating out in a restaurant and staying in a hotel are acts of extravagance. Even a happy meal does not make a common man happy, due to multiple taxes.

Pricey as it already is, the cost of eating out in a restaurant and staying in hotel is increased due to multiple taxes such as service tax, sales tax (VAT), luxury tax and other customary charges levied by hotels and restaurants.

Service worries

In May 2011, the Central government imposed service tax on restaurants having AC facility and license to serve alcohol beverages. Effective April 2013, levy of service tax was extended to all restaurants having AC facility.

Hotels and restaurants were already paying VAT on amount received towards supply of food and luxury tax on amount received towards accommodation charges to the state government.

In a writ petition filed with the Kerala High Court, the petitioners contested the levy of service tax, on transactions on which VAT or luxury taxes were being paid, as being unconstitutional. The view was accepted by the single member bench and subsequently by the division bench.

The High Court, referring to the Constitutional amendment, observed that supply of food and beverage is deemed as sale of goods and does not involve services.

Further, even the service part involved in the supply of food and beverage is deemed to be sale of good, thereby exigible to VAT and no service tax can be levied on it.

Further, the Kerala High Court observed that luxuries provided by hotels are subjected to luxury tax by the state and, hence, cannot be subjected to service tax.

In brief, the Court affirmed that the Centre has no power to levy service tax on services provided by AC restaurants and hotels.

The decision is further supported by the recent stay granted by the Telangana and Andhra Pradesh High Court, on coercive recovery of service tax on supply and sale of food and drinks in bar.

The other take

It would be too early to exult based on these favourable decisions as judiciary in different states has conflicting views on levy of service tax on services provided by hotels and AC restaurants.

The Bombay High Court on the similar issue contested by Indian Hotels and Restaurants Association upheld the validity of service tax on hotels and AC restaurants.

The Court observed that by levying service tax on restaurants, Parliament has not transgressed into the powers of state governments to impose tax on sale of goods. Service tax is a distinct tax levied on services provided in relation to supply of food in a restaurant.

Evidently, the Bombay High Court affirmed levy of service tax on services provided by AC restaurants.

In the absence of unanimous ruling of judiciary on the issue of levy of service tax on services provided by restaurants, the applicability of the Kerala High Court judgment seems to be limited to the state.

If considered, it would take a while before the Apex Court ends the commotion. Till then, it is unlikely that hotels and restaurants will absorb the burden of multiple taxes.

Additional burden of taxes would be passed on the customers thereby making cost of such indulgence a privilege to consumers.

It is imperative to consider rationalisation of taxes to avoid multiplicity of taxes on some items of expenses to have an equitable tax structure which remains fair to the common man.

The writers are chartered accountants

Published on December 29, 2014

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