AIR-CONDITIONED RESTAURANTS TO ATTRACT SERVICE TAX

[Dr. Sanjiv Agarwal]

Service tax has been imposed on restaurants or such establishments, by whatever name called, having licence o serve alcoholic beverages for services provided to any person in relation to serving food and beverages including alcoholic beverages, by the Finance Act, 2011 wef 1.5.2011 vide Notification No. 29/2011-ST dated 25.4.2011. The gross amount charged by the restaurants to service recipient shall be charged to service tax, subject to abetments or exemptions.

Meaning of Restaurant

The term ‘restaurant’ has not been defined in the Finance Act, 1997 and as such, we shall have to look at other meanings / definitions.

Oxford English Dictionary defines restaurant as a place where people pay to sit and eat meals that are cooked and served on the premises. This word has a French origin ‘restaurer’ which means ‘provide food for’. A restaurateur is a person who owns and manages a restaurant.

According to Advanced Law Lexicon, P Ramanatna Aiyar, 2005 ed, -

 “Restaurant” means premises in which is carried on principally or wholly the business of supplying meals or refreshments to the public or a class of the public for consumption on the premises but does not include a restaurant attached to a theatre. [Weekly Holidays Act (18 of 1942), S. 2( c)].

“Restaurant” means any premises, not being a restaurant situated in a hotel referred to in clause (1) of Section 3, in which the business of sale of food or drink to the public is carried on and such premises, at the beginning of any month, are equipped with, or have access to, facilities for air conditioning. [Expenditure Tax Act (35 to 1987), S. 2 (9A)].   

The above two definitions may hold good under respective heads, viz, Weekly Holidays Act, 1942 and Expenditure Tax Act, 1987 but do not hold good for the purpose of levy of service tax. 

While the establishments serving food and beverages have to be essentially air-conditioned, wholly or partly, their location or situation is irrelevant. As the definition of taxable service suggests, ‘by whatever name called’, it may include eating places and joints where food and beverages are served and which are not stand-alone restaurants. The examples could be air-conditioned permit rooms or bars, dance bars, places where special or theme parties are held which meet the criteria, air-conditioned theaters where shows /performances are performed live or otherwise along with serving of food and beverages, lounges, clubs etc. It may also include restaurants situated in multiplexes and shopping malls etc, which is the order of the day.

Taxable Services

Section 65 (105) (zzzzv) defines taxable services as under-

“Any service provided or to be provided   to any person, by a 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 licence to serve alcoholic beverages, in relation to serving of food or beverage, including alcoholic beverages or both, in its premises”.

The Finance Act, 2011 seeks to levy service tax on services provided by air conditioned restaurants also having licence to serve alcoholic beverages in relation to serving food and / or beverages.

Thus, taxable services should have following essential features-

(a) services shall be provided by a restaurant or any establishment rendering such service and called by whatever name (say, a club, a eating joint fulfilling criteria, coffee houses etc)

(b) service can be provided to any person

(c) restaurant should have a facility of air  conditioning in whole or any part of the restaurant during any time during the financial year .

(d) restaurant should have licence to serve alcoholic beverages, whether actually serving such beverages or not.

e) eligible restaurants providing services in relation to serving food or beverages including alcoholic beverage,  or both in its premises shall be liable to service tax.

Departmental Clarifications   

CBEC has vide Letter No. DOF 334/3/2011-TRU dated 28.2.2011 clarified as under –

“1. Services provided by a restaurant

1.1 Restaurants provide a number of services normally in combination with the meal and/or beverage for a consolidated charge. These services relate to the use of restaurant space and furniture, air-conditioning, well-trained waiters, linen, cutlery and crockery, music, live or otherwise, or a dance floor. The customer also has the benefit of personalized service by indicating his preference for certain ingredients e.g. salt, chilies, onion, garlic or oil. The extent and quality of services available in a restaurant is directly reflected in the margin charged over the direct costs. It is thus not uncommon to notice even packaged products being sold at prices far in excess of the MRP.

1.2 In certain restaurants the owners get into revenue-sharing arrangements with another person, who takes the responsibility of preparation of food, with his own materials and ingredients, while the owner takes responsibility for making the space available, its decoration, furniture, cutlery, crockery and music etc. The total bill, which is composite, is shared between the two parties in terms of the contract. Here the consideration for services provided by the restaurants is more clearly demarcated.

1.3 Another arrangement is whereby the restaurant separates a certain portion of the bill as service charge. This amount is meant to be shared amongst the staff who attend the customers. Though this amount is exclusively for the services it does not represent the full of value of all services rendered by the restaurants.

1.4 The new levy is directed at services provided by high-end restaurants that are air conditioned and have license to serve liquor. Such restaurants provide conditions and ambience in a manner that service provided may assume predominance over the food in many situations. It should not be confused with mere sale of food at any eating house, where such services are materially absent or so minimal that it will be difficult to establish that any service in any meaningful way is being provided.

1.5 It is not necessary that the facility of air-conditioning is available round the year. If the facility is available at any time during the financial year the conditions for the levy shall be met.

1.6 The levy is intended to be confined to the value of services contained in the composite contract and shall not cover either the meal portion in the composite contract or mere sale of food by way of pick-up or home delivery, as also goods sold at MRP. Finance Minister has announced in his budget speech 70% abatement on this service, which is, inter-alia, meant to separate such portion of the bill as relates to the deemed sale of meals and beverages. The relevant notification will be issued when the levy is operationalized after the enactment of the Finance Bill”. 

CBEC has vide Letter No. 334/3/2011-Tax dated 25.4.2011 clarified as under –

“Services provided by a Restaurant

An exemption @ 70% of the gross value i.e. the total price charged by the restaurant has been given by amending the notification No. 1/2006-ST, dated 1-3-2006 vide notification No. 34/2011-ST, dated April 25, 2011. The exemption is available provided no Cenvat credit is availed either of inputs or input services. It is clarified that the exemption is available on the gross price charged by the restaurant for the taxable service, including any portion shown separately e.g. service charge. However the amount paid by the customer ex gratia e.g. as tip to any member of the staff doesn't constitute consideration paid to the restaurant and shall remain outside this levy”.

Value of Taxable Service

Value of taxable services shall not included sale of goods at MRP and sale of food at the counter or home delivery services. An abatement of 70 percent shall be allowed to allow for deemed sale of food and other costs vide Notification No. 34/2011-ST dated 25.4.2011 wef 1.5.2011 which amends  Notification No. 1/2006-ST

The exemption shall be available on the gross price / amount charged by the restaurant for the taxable services provided and it shall include any amount shown separately in the breakup of gross amount such as service charges or service surcharge or special cover charges. However, following amounts shall be excluded from the gross value –

a) amount paid the customer as ex gratia, generally called as tip meant for staff members.

b) local taxes including entertainment tax.

c) sales tax or VAT charged on food sale.

d) sale value of goods sold at MRP.

e) delivery charges (for home delivery service)

Many restaurants charge event charges and special prices such as on Christmas eve, new year eve, various functions / programmes / food festivals or during live screening of matches etc. Such amounts shall also be liable to service tax.

Specific exemption

An abatement of 70 per cent shall be allowed to service provider for the taxable services rendered vide Notification No. 1/2006-ST dated 1.3.2006 as amended by Notification No. 34/2011-ST dated 25.4.2011 by insertion of entry No 13. In the said notification.

Person Liable

Any restaurant, by whatever name called which is air-conditioned and has licence to serve alcoholic beverages shall be the person liable to pay service tax.