Tuesday, April 21, 2015

Are Restaurant and Hotels adapting to unfair business practices?

I have brought an article titled 
जब रेस्टोरेन्ट वाला सर्विस चार्ज बिल में लगाता है तो फिर आप टिप क्यों दें । in my blog on 13th December 2012. The link to the article is

 An email was mailed to Hotel Association of India and Hospitality India to seek their views on 17/11/2014 followed by a reminder on 17/04/2015. Both have preferred not to respond with their views on the charges. Surprisingly the email ids stated on website of Hospitality India are wrong and was again mailed to email ids of other officials which again remained unresponsive. The content of the email is reproduced: "
The hotel and restaurants apparently are not following a standard procedure to levy VAT, Service Charges and Service Taxes and the eaters generally get confused. We shall be grateful if you could abreast us with the nature of such charges and the rates at which these gets added into the bills. Please also state whether the charges are compulsory or optional.  

We would appreciate if you could illustrate the same with some assumptions by return mail.")

I am now bringing out my analysis keeping in view the recent judgment of Uttarakhand High Court ruling that VAT is chargeable on 60% of the food bill as 40% of the food bill is already taxed with Service Tax. 

The Restaurant and Hotel industry in India is quite complex in nature. While it is quite complex in nature, the diners and guest to the restaurants and hotels are also facing various issues like charging of VAT, Service Tax, Service charges etc. 

As per media reports, National Restaurant Association of India in its report titled "India Food Service Report-2013" has estimated the current size of the Indian food industry to be at Rs 247,680 crore per annum and projected growth rate of 11 percent to touch a staggering Rs 408,040 crore by 2018. 

With such a size of the industry, he industry is also a  complex suffering with mushrooming of restaurants as unorganized sector. The industry varies from like in-door catering, out-door catering, fast food chains, small restaurants, AC and Non-AC restaurants and restaurants in the markets, restaurants on the highways, dhabas and are practically present in every nook and corner of the country.  Many restaurants cater only to the take away item prominently including free home delivery concept within certain distances with no dining space. There are number of issues involved like generating manual bills, generating bill in the form of a slip or through computer, applicability of certain taxes based on certain parameters like AC or non-Ac Restaurants etc. It also suffers with issues like sales tax evasion, inadequate enforcement, inadequate complaint handling system, duplicates/fake bills, under-billing, over-charging, cash transactions and poor prosecution, practically absence of awareness among consumers and absence of transparent system of tax evasions petitions etc.
1.    The dining in the restaurant is mostly through the menu card.  While most of the restaurant have menu card but there is a absence of menu card in restaurants in remote corners too. The menu contains the list of the items along with their prices with or without stating anything about VAT, Service Tax or Service Charge. These prices are at which the consumers are being billed as cost of food items and beverages. 

2.    The diners will not find any information about the quantity of the items as such it become difficult for them to order the items like Vegetables, Dal, Deserts or any other prepared dish. There is a vide variation in the prices from one restaurant to another depending upon combination of several factors. One of the factors among other is the quantity which cannot be judged based on the prices and is most difficult task due to prevalent of associated factors like air-conditioning, aesthetic, elegance, furniture, space utilization, size of the restaurant etc. In a restaurant, the item may be sufficient to serve for four persons and in other restaurant having the same price may be sufficient for two. Why the menu card should not have details like “Qty sufficient for normal serving”.
3.    The prices as indicated in the menu are the cost of the food items and beverages at which the diners make fair idea about the estimated bill that he/she is going to pay for at the end of dining. Based on these assumptions, the diners place orders depending upon affordability etc. However, on receiving the bill after dining it is noticed that the bill amount is more than the assumption at the time of placing orders. The extra amount could be in the range of 15% to 30 or even 40%. The  extra amount being charged in the restaurants as a practice consist on account of following

1. Service Charge: The service charge is charged towards providing service to the consumers. Whereas some restaurants do not charge service charges, the same differs from restaurant to restaurant. Usually service charges are in the range of 5% to 20% depending upon the level of restaurant. The service charges could also be termed as the compulsory tip which otherwise needs to be optional depending upon the wish the consumer desire to opt for to pay to the waiter or not. The term “service charge” is also misnomer as most of the diners are under the impression that it is another form of the tax and such amount goes to governments. While the service charge has already been charged, they  pay again some extra amount to the waiter as “tip”. This leads to double payment one as part of the bill and the other as extra payment as tip. In case the diner is smart enough not to pay extra tip where the service charge has been included in the bill, the behavior of the waiter at the time of payment make diner to feel awkward. The tip or service charge thus imposed compulsorily may not make improvement in the services. 

The optional tip is an incentive to the waiter to provide the customer the best of his services to please the customers. The compulsory service charges are irrespective of the quality of the service being offered by the waiters. The consumer does not have any option to deduct the service charge from the bill in case of poor service. However, it is also noticed that despite the restaurants charging the service charges, the waiters expect some additional tip or the customer himself pay thinking that the service charges are the taxes to the government. It also do not provide any incentive for betterment of the services to the customer as the same are being charged in the bill irrespective of whether the consumer has got the service or not. The charging of  service charge should be an optional charge and to be left to the consumer. 
                     Ministry of Finance while fixing the rate of service tax has assumed that in the bill of the food and beverages, 60% is the cost of food and 40% is the value towards services in the case of indoor catering and the same assumption for the outdoor catering is 40% and 60% respectively. When such is the high incidence of services has been included in the value of the food and beverages, any compulsory addition of charges like service charge could be unfair to the consumers. Another point of argument could be that there is a wide range of the prices of the dishes from one restaurant to another. This difference could be even as high as three times the price of the same dish in some other restaurant. Now the cost of input of any dish could be nearby of the same order then such a vast difference in the selling price is due to other charges in the services and hence charging again service charges in the bill is unfair to the consumer.  Over and above the restaurants are also charging VAT on the service charge.  

      Therefore,    The service charge being charged by the restaurant should be made optional an the restaurant should also display prominently in the restaurant as well as on menu card  that                paying “Tip” or “Service Charge” is an optional.

2. Service Tax: Ministry of Finance notification introducing the Service Tax (Determination of Value) Rules, 2012, the restaurants are required to charge service tax on the 40% of the cost of food. It makes 4.94% of the sale bill of the food and beverages items. The service charges are charged as per Ministry of Finance notification No. 24/2012 dtd. 6th June 2012 which has divided the amount of the food bill in two parts as below:
a)      For indoor catering/dining: Cost of the food bill as 60% and the value of services as 40%.
b)      For outdoor catering: Cost of the food bill as 40% and value of services as 60%

However, there are number of issues involved in charging of service tax:-
The restaurants should be an air conditioned. The chances for charging service tax in the non-air conditioned restaurants could not be ruled out due to ignorance of the diners. There have been complaints in the print media of double billing system due to computerization i.e one for the diners showing service tax amount and the other for the authorities showing no charging of service tax. In this process even though the service tax has been charged which otherwise should not have been charged but is also evaded. In view of the above, the restaurants need to be mandated for display of service tax to be charged prominently in the restaurants. The same also need to be printed in the bill
3. VAT: In most of the restaurants rather every restaurant is charging VAT on 100% value of the food items as per menu. As brought out earlier when the service tax is to be charged on 40% value of the bill, the VAT also should be charged on balance i.e 60% of the bill. While the restaurants/caters are charging VAT on 100% value of the bill, it is chargeable only on 60% or 40% depending upon whether it is indoor or outdoor as there is a separate service tax on the value of the services has been charged as per point No. 2.2 and therefore charging VAT on 100% value means double charging of taxes for the value of the services. Hon’ble High Court of Uttarakhand and Chhattisgarh have already adjudicated that such double taxation cannot be charged.  High Court of Uttrakhand in an application under Section 57 of VAT Act 2005 has concluded that Value Added Tax can be imposed on sale of goods and not on the service. Service can be taxed by the Sales Tax Law. Therefore element of service has been so declared and brought under the Sales Tax vide Government of India notification dated 06/06/2012 i.e. 40% of the bill amount to customers having food are beverages in the restaurant was made liable to service tax, no value added tax can be imposed there on. It means Value Added Tax can be charged only on 60% of the cost of the food bill in the cost of indoor catering and 40% in case of outdoor catering. It has also come to noticed that some restaurants are charging VAT on the cost of the food bill plus Sales Tax which is an illegal practice. The decision of the High Court of Uttrakhand established hat two taxes i.e. Value Added Tax and Sales Tax cannot be imposed on the same value of the transaction. In view of the above the bill is recommended to be as below:-
(i)                 Cost of food items as per menu = x
(ii)               Sales Tax = y % of 0.4x or 0.6x
(iii)             VAT = y % of 0.6x or 0.4x
Total = (i) + (ii) + (iii)

  4. One can even observe that restaurants are also charging VAT and Service Tax on the packaged commodities like packaged beverages etc. which usually are carrying MRP. MRP is already defined as inclusive of all taxes and therefore charging of VAT and Service Tax on the beverages become illegal. While it is also illegal it may be getting evaded. Why not two bills are generated one bill for food items charging VAT and Service Tax and the 2nd bill for packaged beverages which are duly marked with MRP need to be charged without any additional VAT and Service Tax.

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