How should 'service charge' in restaurant be calculated

New Delhi, July 14: Service charges levied on customers by some restaurants do not end up in the government exchequer and are retained by the outlets, the fince ministry clarified on Tuesday.

"Some restaurants/hotels/eateries besides charging for the food and beverages are also charging 'service charges' in their bills. The proceeds of the 'service charges' are retained by the restaurants/hotels/eateries," an official statement here said with reference to "misapprehensions" that these are being collected on behalf of the government as tax.

The ministry also clarified that the effective service tax rate on serving food or beverage by a restaurant having air-conditioning or central heating is 5.6 percent of the total amount charged.

With the increase in the service tax rate to 14 percent from June 1, the tax rate is effectively 5.6 percent of the total amount charged.

Fince Minister Arun Jaitley, in his budget, had proposed to raise service tax from 12.36 percent (including education cess) to 14 percent. The tax is levied on all services, except a small negative list.

Last month, the ministry announced that restaurants without air conditioning facility will not charge any service tax from their customers while those with ACs will charge only on the 40 percent of the total bill amount.

"Restaurants, eating joints or messes which do not have the facility of air-conditioning or central air-heating in any part of the establishment are exempt from service tax," the ministry said in a clarification.