A new category of taxable service for levy of service tax on restaurants was introduced by insertion of sub-clause (zzzzv) in clause (105) of Section 65 of the Finance Act, 1994. This made restaurant service a taxable service w.e.f. 01/05/2011. Since in a restaurant service sale element is also involved, an abatement of 70 per cent was provided for the purposes of valuation vide Notification No. 34/2011-ST. Thus, service tax was levied on 30 per cent of Gross amount charged by the service provider.
Under Negative List w.e.f 01/07/2012
Section 66E was inserted for introducing the new concept of DECLARED SERVICES under the service tax legislature. In the same, restaurant services were held as declared services. However, Mega Exemption Notification No. 25/2012 entry no. 19 provided that restaurants, eating joints or mess other than those having the facility of air conditioning or central air-heating in any part of the establishment, at any time during the year and a license to serve alcoholic beverages shall be exempt from service tax. Further, for the purpose of valuation, Rule 2C of Service Tax (Determination of Value) Rules, 2006 provided that service tax would be levied on 40% of gross amount charged by the service provider. Thus under negative list, restaurant industry was imposed to additional service tax on 10% of value on gross amount charged as compared to earlier levy. As service tax is levied only on the service portion involved in a transaction, in this case, we fail to understand, how the service portion involved in a particular industry increased (30% to 40%) due to major change in legislation(Introduction of Negative list Regime).
Recently, Notification No. 3/2013 has amended Notification No. 25/2012(Mega exemption) according to which service tax will be levied even on the restaurants which do not have a licence to serve alcoholic beverages. This is a major change for the industry as thousands of restaurants and eating joints including small and medium have come within the ambit of Service Tax. The Change is effective from 01/04/13. This change will have direct impact on the pocket of common man. Due to this change, even a small eating joint having a seating arrangement and the facility of air conditioning in the establishment shall be liable to service tax even if operating in places like hospitals, temples etc.
This amendment would lead to many questions like:
· Would a Canteen in a factory, be subject to service tax although there is a statutory requirement under the Factories Act, 1948 to operate such canteen?
· Would eating joints providing self service be subject to service tax?
· What will be the value of goods sold at MRP along with other food served for the purpose of calculating service tax?
· There are number of eating joints that provide food items in disposable plates or boxes to the customers for consumption at a later point of time or they can consume the same at the spot only. In such cases no element of service is involved, would such transactions be subject to service tax?
· In case of Home Delivery, no service tax will be levied. Now, if both fine dining as well as home delivery facility is provided, what all records are required to be maintained by the assessee to differentiate both the transactions?
· What will be the service tax liability, in the case of food courts at malls as they do not have individual air conditioning facility but they have central air conditioning facility administered by the mall authorities?
There are many unanswered questions which have come up due to the above amendment made in the Mega Exemption Notification in this Budget.
Food is a requisite for survival. In our view, food sold in exorbitant restaurants where customers are mainly upper class should be subject to service tax since in these restaurants price charged from customers are high only on account of service element involved along with sale of food. This industry already faces the problem of double taxation, one under service tax and second under the State VAT laws. Therefore, through this article, we request the Hon’ble authorities to issue necessary clarifications so that precious time of revenue authorities, courts and tax payers can be saved and proper compliance of service tax liability can be done.
Disclaimer: Although every precaution has been taken in writing the article. Author will not be responsible for any damage or loss in whatever manner consequent to any action taken on the basis of any content of this Article.
By: Ankit Gupta and team
Published in Service Tax
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