From the plain and simple reading of the provisions of the Service Tax Law, one will simply understand that Service Tax can be levied only on the service portion of any activity. But generally the restaurant owners charge Service Tax on the total bill rather than only on the service portion of the bill. For this restaurant owners are frequently blamed by their customers.
The following kind of calculation procedure is generally followed:
Food and Beverage = Rs. 1000.00
Service Charges @10% = Rs. 100.00 (10% on the Food and beverage amount)
Service Tax @ 4.94% = Rs. 54.34 (4.94% on Food & Beverages + Service Charges)
VAT @14.5% = Rs. 145.00
Total = Rs. 1299.34
Let's first verify the service tax rate in the above mentioned example:
There is only one rate of service tax that is notified by the government in case restaurant business and that is 12.36%. So the question arises where from the restaurant owners got this rate of 4.94%?
Now, if we deeply read the provisions of the Service Tax Law there is a provision given by the government which provides the straight away procedure for calculation of service portion of the Gross Value Charged by the Service Provider, instead dividing the service portions in actual. As per the provision, 40% of the total amount is considered to be the Service portion.
Let's revisit the above example and verify the calculations:
Rate of Service Tax = 12.36%
Total Value = Rs. 1100.00 (Value of Food & Beverages + Service Portion)
Value of Service Portion @ 40% = Rs. 1100.00 x 40% = Rs. 440.00
Service Tax @ 12.36% = Rs. 440.00 x 12.36% = Rs. 54.38 = Rs. 54.34 (differences is due to approximation errors)
Restaurant owners instead of calculating 40% on the Total Value (as above),
Calculate on the rate of service tax as shown below:
12.36% x 40% = 4.944% = 4.94% (approximately).
Hence, it is to be decided whether the restaurant owners are to be blamed or the ones who have designed the law or the calculation procedure followed by the restaurant owners or the billing details given by the restaurant owners.