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The Kerala High Court on 03.07.2013 declared as "unconstitutional" the imposition of Service Tax on Hotels and Restaurants by the Centre by amending the Finance Act. 

Section 65 (44) Clause 105 of Chapter V of the Finance Act has been amended thereby the service provided or to be provided to any person by (1) restaurant, by whatever name called, having the facility of air-conditioning in any part of the establishment, at any time during the financial year, which has license to serve alcoholic beverages, in relation to serving of food or beverage, including alcoholic beverages or both, in its premises and (2) hotel, inn, guest house, club or camp-site, by whatever name called, in relation to providing of accommodation for a continuous period of less than three months; are brought under the definition of taxable service. This has come into effect from 01.07.2012.  Therefore all AC Restaurants were exigible to Service tax satisfying the two conditions.

Later, in the Union Budget 2013-14, the Central Government vide Notification No. 03/2013-ST dated 1st March 2013  has amended S. No. 19 of Notification 25/2012, and deleted point (ii) thereof.

It is clarified here that the exemption from service tax to restaurants, eating joints, mess etc. will be available only when such restaurant doesn’t have the facility of air conditioning or central air heating in any part of the establishment, at any time during the year. So, all the restaurants were directed to comply with Service tax provisions with effect from 01.04.2013.  There was big hue and cry from the Hotel Association throughout India for this levy.


“2C. Determination of value of taxable service involved in supply of food and drinks in a restaurant or as outdoor catering.- Subject to the provisions of section 67, the value of taxable service involved in the supply of food or drinks for consumption either in a restaurant or as outdoor catering service, either by itself or along with other services, shall be the percentage of total amount, specified in column 3 against the respective description of services mentioned in the following Table:-





Percentage of

 total amount





Service involved in the supply of food or any other article of human consumption or any drink  at a restaurant



Service involved in the supply of food or any other article of human consumption or any drink  as outdoor catering service


As per this Rule, abatement has been allowed for the Service Tax on the food served in the restaurants and the service tax will be applicable on 40% of the food bill i.e., @4.944%


The constitutional validity of the amendment was challenged before the Honourable High Court of Kerala by the Kerala Classified Hotels and Resorts Association vide W P (C) 14045 of 2011  and other Hotels and Restaurants.  The petitioners contended that Article 366 Section 29 (f) of the Constitution defined supply of food and drinks in hotels as “deemed sales” and empowered the State Governments to collect Sales tax (VAT) on the total value of sales and therefore the Centre has no authority or power to collect service tax on it.. The Honourable Court admitted the WP and granted stay against any coercive steps for recovery of service tax  for a period of 2 months and later extended until further orders.

A single bench of Justice AM Shafique passed the order while allowing a batch of petitions filed by the Kerala Classified Hotels and Restaurants Association, and has pronounced the judgment on 03-07-2013 on the following lines:

a. It is declared that Sub Clause (zzzzv) and (zzzzw) to clause 105 of section 65 of the Finance Act 1994 as amended by the Finance Act 2011 is beyond the legislative competence of the parliament as the clauses are covered by Entry 54 and Entry 62 respectively of List II of Seventh Schedule.

b. If the petitioners have made any payments on the basis of the impugned clauses, they are entitled to seek refund of the amount.


The court observed that “the every purpose of incorporating the definition of tax on sale or purchase of goods in Article 366 was to empower the State Government to impose tax the supply, whether it was by way of or as part of any service of goods either being food or any other article for human consumption or any drink, intoxicating or not”.  The Constitution permitted sale of goods during service as taxable.  Necessarily, service formed part of sale of goods.

By: R.K Rengaraj M.Com., MBA., LL.B


The author can be reached at renga42002@yahoo.co.in


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