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Now when are you sitting at restaurants and looking at the expensive menu card you need to worry more because you have to pay more.

Yes, the taxes they will make your pockets weigh less. We are paying VAT to the State Govt. on the whole bill and on 40% of the bill amount service tax to the central parallel on the same bill constituting double levy of tax on 40% bill amount. And from now onwards your bill amount will increase more as service tax is increased.

The Service tax portion on bill is increased to 5.6%(i.e. 40*14%) from 4.944%(i.e40*12.36%) from 1st of June,2015.

Lets see from where all this started,

Taxability in case of restaurant prior to introduction of service tax:

Prior to introduction of service tax the activities of restaurant i.e. supply of food and drinks were charged under Sales Tax as Deemed Sales. States were charging VAT on full value of bills which was supported by the judgement from the Constitutional bench of Supreme Court in case of

K. Damodarasamy Naidu & Bros., in which SC held that bill raised cannot be split as charged for service part and as charged for food and drinks part. The supply of food/drinks by the restaurant owner to the customer , though it may be a part of the service that he renders by providing good furniture, furnishing, linen, crockery, music etc, tax is leviable for the whole amount of the consideration received by the restaurant owner.

Thus, there was no ST and hence, there was no double taxation.

Taxability after introduction of Service Tax:

States were charging VAT on full value and later CG imposed ST on ‘40% of the bill amount’ through insertion of Rule 2C in Service Tax( Determination of value Rules).

The Restaurant owners (deemed dealers) started facing problem of double taxation.

Many of them knock the doors of houses of lords in order to justify the issue in which few owners challenged VAT and few challenged Service Tax.

Challenging ST:

Kerala HC in case of Kerala Bar Hotels Association, Cochin in 2014 held that

Levy of VAT on full value is proper. Levy of ST is inappropriate (such levy is unconstitutional as CG cannot tax something which is in the domain of SG). Since the whole of the consideration received by restaurant owner for supply of Food and other articles of the human consumption, including the service part of the transaction, is exigible to sales tax by the State Govt, it is not open to the union to characterize the sae transaction as service for imposition and levy of ST.

Bombay HC in case of Indian Hotels & Restaurant Association in 2014 held that

Levy of ST is constitutional and valid.

Judgement in K. Damodarasamy Naidu & Bros. enables levy of sales tax by states but does not charge of Service Tax by Centre. The concept of catering admittedly includes a concept of rendering service. The fact that tax on sale of Goods involved in the said service can be levied, does not mean that service tax cannot be levied in the service aspect of Catering. Hence, imposition of ST was valid.

Challenging VAT:

Uttrakhand HC in case of Valley Hotels & Resorts in 2014 held that

Levy of  ST is proper whereas levy of VAT on full value is inappropriate ,it should be levied on part of vaue only.

To resolve this issue CG has exempted services provided by Non AC restaurants in Mega Exemption 25/2012 and recently also added that the service provided by AC restaurants in factories registered under Factory Act.

But still there is double levy on AC restaurants which is likely to be resolved after the introduction of Goods and Service Tax.

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Category Service Tax, Other Articles by - Prateek Jain