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VAT on Restaurant Bill

Pankaj Gandhi Jaiswal  
on 25 April 2016

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It is well known and settled fact that restaurant bill includes both component Goods and Service. And since service component is there central government is levying service tax on discounted rate means on 40% value of entire bill considering 40% as a service. If restaurant owners are charging VAT on entire bill means they are charging, collecting and depositing the VAT on service part also then charging, collecting and depositing the VAT on service part is unconstitutional and against the soul and objective of article 366(29A) of constitution.

Collecting unconstitutionally VAT on service components of restaurant bill is actually unjust enrichment of VAT department and also public of state is paying unnecessary tax from their pocket to make unjust enrich to VAT Department.

Also some restaurant in absence of clarity on law charging service tax on Packed Items having MRP which is incorrect.

It is unconstitutional practice which is against the soul and objective of constitution as well as against the Public Interest.

As per settled law VAT can be imposed on sale of goods only and not on service. Service can be taxed by Service Tax Laws. The authority competent to impose service tax has also assumed competence to declare what is service. If State has not challenged the same, it means state has accepted cum assumed 40% is service part on restaurant bill. Therefore, where element of service has been so declared and brought under the Service Tax vide Government of India notification dated 06.06.2012, (i.e. 40% of bill amount to the customers having food or beverage in the restaurant was made liable to service tax) no Value Added Tax can be imposed thereon.

For better understanding I am reproducing and attaching herewith the constitutional, legal and judicial background on this case.

A. Constitutional Background

Before 46th Amendment of the Constitution, there was lack of clarity on taxation of bundle cases where material and service both involved in one transaction including works contract. In Landmark decision of State of Madras vs Gannan Dunkerley & Co (Madras ) Ltd. (1958)9 STC 353(SC), pertaining to sales tax , Honorable Supreme Court held that a building contract is one entire and indivisible contract ; there is no sale of goods as a separate contract. A series of the judgment of HC & SC followed this case taking the same view.

Thereafter due to effect of this decision and on recommendation of Law Commission and In order to levy tax on such contracts parliament amended the article of constitution.

And as introduced by the 46th Amendment of the Constitution, bundle cases where material and service both involved in one transaction including works contract were now made divisible into contract of supply of goods and supply of labour and services. In this sense due to this amendment and due to legal fiction indivisible contract become divisible.For Clear understanding I am reproducing here the full clause of Article 366 (29A) after amendment.

Article 366..

(29A) “tax on the sale or purchase of goods” includes—

(a) a tax on the transfer, otherwise than in pursuance of a contract, of property in any goods for cash, deferred payment or other valuable consideration;

(b) a tax on the transfer of property in goods (whether as goods or in some other form)  involved in the execution of a works contract;

(c) a tax on the delivery of goods on hire-purchase or any system of payment by installments;

(d) a tax on the transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration;

(e) a tax on the supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration;

(f) a tax on the supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration;

and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made;

Now by virtue of Article 366( 29A)(b) of the Constitution of India, the entire indivisible transaction is made divisible by legal fiction into one for sale of goods and other for supply of labour and service.

Also you please note that constitution is allowing taxability on the transfer of property in goods, means as referred “tax on the sale or purchase of goods”, it will be on goods and not other part of bill.

Constitution has specified only “tax on the sale or purchase of goods” is on transfer of property in goods. It means “tax on the sale or purchase of goods” on transfer of property of “non goods” is not subject to sales tax like on service price/ service tax.

This amendment exclusively defines that VAT will be only on Goods and not on other part. In case of bundle cases where material and service both involved in one transaction including works contract,  and on Non Goods Part, VAT can not be applied. Accordingly all the state VAT law has to follow provision of Article 366(29A) and any state law, rule, notification and circular should be according to this article. Any state law, rule, notification and circular if against the objective and provision of said article 366(29A), shall be void.

HIGH COURT
IN THE HIGH COURT OF UTTARAKHAND AT NAINITAL
Commercial Tax Revision No.02 of 2014RULLING

Valley Hotel & Resorts,
Through its partner Shri Arun Goyal),
Khasra No.1011/2,
Central Hope Town,
Selaqui, Chakrata Road,
Dehradun….. …..Revisionist/Applicant.

Versus

The Commissioner,Commercial Tax, Dehradun. .….Respondent
Mr. P.R. Mullick, Advocate for the revisionist.
Ms. Puja Banga, Brief Holder for the State of Uttarakhand/respondent.

Dated: April 10, 2014
Coram: Hon’ble Barin Ghosh, C.J.

Hon’ble V.K. Bist, J.
(Per: V.K. Bist, J.)

The revisionist is a partnership firm, engaged in the business of hotel. It provides boarding and lodging facilities to its customers. It also provides restaurant services. Upto 01.07.2012, the activities of the revisionist were covered under the Uttarakhand Vat Act, 2005 in respect to supply of cooked food in the restaurant. On 06.06.2012, the Government of India,Ministry of Finance (Department of Revenue) issued a notification amending the Service Tax (Determination of Value) Rules, 2006 by introducing Service Tax (Determination of Value) Rules, 2012, by which 40% of billed value to the customer, for supply of food or any other article of human consumption or any drink in restaurant, was made liable to Service Tax. Thereafter, the revisionist  moved an application under Section 57 of the VAT Act, 2005, requesting not to charge VAT on 40% billed amount to the customer, as same has already suffered Service Tax. The said application was rejected by the Commissioner, Commercial Tax, against which appeal was filed before Commercial Tax Tribunal. Same was also dismissed. Aggrieved thereby,the present revision has been filed.

2. We have considered the submission of learned counsel for the parties. Value Added Tax can be imposed on sale of goods and not on service. Service can be taxed by Service Tax Laws. The authority competent to impose service tax has also assumed competence to declare what is service. The State has not challenged the same. Therefore, where element of service has been so declared and brought under the Service Tax vide Government of India notification dated 06.06.2012, (i.e. 40% of bill amount to the customers having food or beverage in the restaurant was made liable to service tax) no Value Added Tax can be imposed thereon.

3. In our view, the Commissioner, Commercial Tax erred in rejecting the application of the revisionist. Thus, the revision is allowed. Judgments of Tribunal as well as of the Commissioner, Commercial Tax are set aside. The Commissioner, Commercial Tax is directed to pass order afresh in the light of above observations.

(V.K. Bist, J.) (Barin Ghosh, C.J.)
10.04.2014

SUPREME COURT RULING

The Supreme Court’s judgment in IMAGIC CREATIVE PVT LTD Vs COMMISSIONER OF COMMERCIAL TAXES, reported in 2008-TIOL-04-SC-VAT, has thrown up several interesting questions of the leviability of VAT on composite and indivisible contracts.

The question that arose before the Apex Court was, whether,sales tax could be levied, in terms of the provisions of the Karnataka Sales Tax Act 1957, on the entire value of a contract involving advertising services including the value of services, in respect of which, service tax is being paid. Here was the case of a service provider, who was using materials / goods in the course of providing the service as part of an indivisible contract and had been paying service tax. The Karnataka Commercial Taxes Department took the view that it was a composite contract of sale, wherein the taxable value of the goods sold being printed booklets got enhanced by the utilization of the soft skills involved in the process and that, sales tax was payable on the entire value of the contract. The Karnataka High Court, in a judgment (2006-TIOL-431-HC-KAR-IT), upheld the levy of sales tax on the entire value of the contract, including the service element. On appeal, the Apex Court has held that in an indivisible contract (involving sale of materials and rendering of services), there was no justification for levy of sales tax on the entire transaction value.

Some of the highly relevant wordings used by the Apex Court are reproduced below:

“A distinction must be borne in mind between an indivisible contract and a composite contract. If in a contract, an element to provide service is contained, the purport and object for which the Constitution had to be amended and clause 29A had to be inserted in Article 366, must be kept in mind”  (Para 25).

The Apex Court further states in Para 28 of its order, as follows:

“28. Payments of service tax as also the VAT are mutually exclusive. Therefore, they should be held to be applicable having regard to the respective parameters of service tax and the sales tax as envisaged in a composite contract as contradistinguished from an indivisible contract. It may consist of different elements providing for attracting different nature of levy. It is, therefore, difficult to hold that in a case of this nature, sales tax would be payable on the value of the entire contract; irrespective of the element of service provided”.

We need to keep in mind, the decision rendered by the Apex Court in the BSNL Case, wherein the Apex Court had held in Para 85 of the judgment that “in a composite contract of service and sale, it is possible for the State to tax sale element provided there is a discernible sale and only to extent relatable to such sale”, which continues to hold good, despite this judgment.

This position is understandable, in the light of the VAT laws of the country, wherein, in the case of levy of VAT on works contracts, a deduction towards labour and like charges are allowed, while computing the taxable turnover. There is a corresponding logic that we have under the service tax law, wherein, the value of the goods and materials sold by the service provider to the recipient of the service, are exempted from the levy of service tax, in terms of Notification No. 12/2003-ST dated 20th June 2003, which is still valid.


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