• Service: Tax, Global Indirect Tax
  • Type: Regulatory update
  • Date: 12/12/2013

India – Amendments to and impact of service tax on supplies made by restaurants and eateries 

GITB India
Supplies made by restaurants have historically been liable to VAT (i.e. a state level levy on sale of goods). However, in 2011 the Central Government also imposed service tax (i.e. a Federal levy on rendering of services) on services provided by restaurants, thereby treating a portion of the supply as a ‘service’. The levy was initially charged on services provided by air-conditioned restaurants and eateries with a license to serve alcoholic beverages on the premises. High-end restaurants often provide ambience and air-conditioning in the course of supplying food & beverages (F&B).

Since April 2013, the scope of the service tax levy has been widened to include all air-conditioned restaurants and eateries (irrespective of whether they have a license to serve alcoholic beverages). As a result, a number of small and medium restaurants and eateries now fall within the ambit of the service tax net. Due to the overriding principle that service tax is essentially charged on services, this amendment has also resulted in a number of interpretational ambiguities.

To illustrate this point, there is an ambiguity in relation to malls and food courts where air-conditioning is not provided by the vendor supplying the F&B but is made available by the developer for the entire mall or food court. In this case, while there is an element of service, it is debatable whether the vendors have any role in provision of such services. Similarly, where eateries offer the facility to take-away as well dine-in at their premises, the point of debate is whether there is any element of service in the case of the take-away scenario. If not, perhaps there should be different pricing for take-away and dine-in options? There are a number of other permutations possible that are now being debated. For example, the applicability of service tax on eateries which are predominantly engaged in the take-away business, but also offer a place to sit and eat; ice creameries and coffee houses; cinemas, bowling alleys and amusement parks which provide F&B within the premises; and canteens meant for employees. The application of service tax has a direct impact on compliance as well as the availability of input tax credits.

Currently there is no uniformity in the tax positions adopted by different operators in the F&B industry, not every operator is levying service tax on the supply of F&B. In a recent judicial development, a Court in India struck down the Service Tax citing constitutional provisions on the premise that levying any tax in relation to supply of F&B is a state matter, which is already liable to VAT. It is likely that the Federal Government will file an appeal with the Supreme Court against this ruling and therefore the issue may not be resolved until it is finally adjudicated by the Apex Court.

The long-term solution to these issues is the introduction of a GST regime (which will subsume most of the existing indirect taxes currently in force). However, as a short-term measure, the industry is hoping that the government will introduce a comprehensive circular or clarification. Developments on this issue need to be monitored closely given its wide-ranging impact.

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Global Indirect Tax Brief - December 2013

GITB - December 2013
Global indirect tax brief brings together articles on international VAT developments, written by KPMG member firms'.