Is Service Tax Compulsory in Restaurants? A Comprehensive Guide

The aspect of service charges charged by restaurants has been a hot topic of debate recently. The Ministry of Consumer Affairs has noted that restaurants are charging service charges as a default billing option, even though it is completely voluntary and not required by law. If any of these conditions are not met, the mandatory tip is taxable, along with the rest of the bill. Service charges or other charges that are not specifically listed as tips on an invoice or bill are subject to sales tax. The existence of a union contract or other agreement with respect to tips does not determine the taxability of mandatory tips.

However, in situations involving union contracts, companies must be careful to establish that the conditions set out above have been met. For example, an establishment may impose mandatory tips, declare them separately on checks as tips and, pursuant to a contract or other agreement, donate 100% of the tips to the union. In this case, the establishment would also have to prove that the union gave 100% of the tips to employees in order for the tips to be exempt from sales tax. This condition would also be met if the contract or agreement allows the union to apply employee tips to union dues and other union dues that employees owe, provided that the remaining tips are given to employees. The service tax is a statutory tax (imposed by the government) under the GST.

It applies to the service provider, but is ultimately generated by customers who use a specific service. According to a recent amendment, the service tax will only be charged if the restaurant has air conditioning. Previously, a restaurant was required to also have a bar, but this condition has been removed. During a meeting with the Federation of Hotel & Restaurant Associations of India (FHRAI), it was clarified that charging a restaurant service charge is not illegal or in violation of any law. A service charge is added to the total amount of the bill a customer must pay after eating at a restaurant.

The hotel separately indicates the charges on the bill, such as a tip and service charge, respectively. When customers receive their bill, they may realize that they have been charged a 10% service charge in addition to goods and services tax (GST). According to restaurateurs, this service charge is often kept as a corpus fund which is used for the existence and livelihood of the company. This service charge is intended to be shared with backend staff who add value to the work system and also contribute to the operation of the hotel. According to government guidelines, any tip or gratuity paid by customers for hospitality services should exceed the basic minimum service. If customers are charged anything other than prices and applicable taxes mentioned above without their consent, it would constitute an unfair commercial practice under consumer protection laws. These practices include mandatory collection of service charge, adding default charge without express consent of consumer, eliminating that charge from being optional and voluntary, and embarrassing consumers if they refused to pay the charge.

While customers and government believe that service charge replaces tip and should be voluntary charge, this debate has been going on for past 5 years. This means that customers can decide if they are satisfied with staff's service and want to leave a tip or pay service fee.