27 November 2014
ST are charge on value of service then why ST on Restrarent charge on 40% value of (food+ser charged) why ST on Restra not charge on service charges what logic behind this
25 July 2025
Excellent question — and you're absolutely right to point out the apparent inconsistency between **Service Tax being a "value of service" tax** and the **40% abatement rule** applied to restaurants.
Let me explain the logic behind this with some clarity:
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## 🧾 Your Question Summarized:
> **Why is Service Tax on restaurants charged on 40% of the total bill (including food), and not just on the "service" part like service charges?**
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## ✅ Short Answer:
Because in the case of **restaurant services**, the government considered it a **“bundled” supply** — not pure service, not pure goods — and taxed it on a **notional value of service (40%)**, using an abatement method.
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## 🔍 Detailed Explanation:
### 1. **Composite (Bundled) Service**
In an **air-conditioned restaurant**, the customer gets a **bundle** of services:
* Food (goods) * Service (ambience, waiters, AC, seating, etc.)
> So, it's not just a sale of food or a standalone service — it’s a **composite contract**.
### 2. **Why Not Just Tax "Service Charge"?**
The **"service charge"** you see (say 5% or 10%) on the bill is **not the full value of services provided** — it’s a charge levied by the restaurant (often shared with staff), not the government.
But Service Tax is based on the **value of services embedded in the entire experience** — including the preparation, serving, ambiance, etc.
So, **limiting ST only to service charge would under-tax the actual service portion**.
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### 3. **Rule 2C of the Service Tax (Determination of Value) Rules, 2006**
* For **air-conditioned restaurants**, **40% of the total bill** was deemed to be the value of service. * That’s why **Service Tax was charged on 40%**, with an **abatement of 60%** (considered goods part).
#### Example:
| Item | Amount (₹) | | ----------------------- | ---------- | | Food | 1000 | | Service Charge (say 5%) | 50 | | Total Bill | 1050 | | **40% Value for ST** | 420 | | **ST @12.36% on ₹420** | ₹51.91 |
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### 4. **Government’s Logic (Policy Reasoning)**
* To **simplify compliance**: Rather than splitting bills into "goods" and "services" * To **ensure fair taxation** of services provided under the restaurant experience * **Service Tax was not on entire food value**, but on 40% only (as a deemed service portion)
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## ✅ Summary:
| Point | Clarification | | ---------------------------------- | ----------------------------------------------------------------------------- | | Why not tax only “service charge”? | Because it doesn't reflect full service value | | Why 40% of total bill? | Govt. deemed 40% as representing service part in composite restaurant service | | Legal Basis | Rule 2C of Service Tax Valuation Rules | | What is service charge then? | A restaurant’s own fee (separate from Service Tax) |
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Let me know if you want a comparison with the **post-GST regime**, where this logic changed significantly (with GST split between food & service components).
CAclubindia
