Sevice component.

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CA Nitish Vijay (Querist)
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10 November 2013 Why service Tax is charged on both sale and service component even though a bill is bifurcated into sale and service component by the name of sevice charge?
I dont want a quotation of any srvice tax section,notification or rule.. i just want a logical answer?
For example service tax is charged on both service and sale component in pizza hut bill.

Suresh Ramaswamy

Suresh Ramaswamy (Expert)
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10 November 2013 Dear Nitish,

Since you are interested in a logical answer - here it is.

In the first instance, there is a wrong conception about the term service charge. The term service charge in Hotel & Restaurant Bills is just an additional levy by the management.

Logically there should be a detailed cost sheet to determine the service charges. To levy a flat percentage of the sale bill as service charge defies all logic.

One fails to understand how the service component of preparation of a cup of tea/coffee, serving a scoop of ice-cream and preparation of grilled chicken involves the same quantum of service input. In case you are not conversant with the kitchen, ask your wife, sister or mother. The work-input involved in each of the activities varies hugely - then how can one determine the service charge to be say 10% or 15% of the food bill.

Since there is no logic in quantifying the service component to be the service charge in the hotel or restaurant bill, to restrict the service tax to the service charge component alone is not logical or just.

Emprical studies and experience of CMAs working in the hospitality industry show that the service component in the industry, especially the food & bevarages department is far more than the 10% or 15% charged by hotels / restaurants.

Realizing, the practical difficulties in accurately computing the service component, the Government adopted a thumb rule of 60% materials and 40% service in each bill. In other words, on a bill of Rs.100/- (inclusive of service charges of Rs.10/-) the restaurant (if it is air-conditioned) levies a service tax on 40% thereof i.e. on Rs.40/-, the service tax component is 4.944% of the whole bill or say Rs.4.94 at the applicable service tax rate of 12.36%.

I hope that now the logic of levy of service tax both on the sale and service charges component of a bill at Pizza Hut is clear to you.

Regards.

Suresh Ramaswamy.

CA Nitish Vijay

CA Nitish Vijay (Querist)
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11 November 2013 Thank you Suresh ji.

Suresh Ramaswamy

Suresh Ramaswamy (Expert)
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12 November 2013 You are most welcome Nitish.

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