Service Tax cripples Restaurants

With the 2011 Finance Bill having brought restaurant services under the tax ambit, restaurants fear newer taxes will add to inflation and consequently impact the footfall
Restaurant bill

The Financial Bill of the 2011 Union Budget has proposed that Service Tax of 10% will be leviable on services provided by a hotel or restaurant, effective from 1st May, 2011. The budget added 203 services to the already available list of 117 services coming under the service tax net. The new taxation policy would cover hotel accommodation above Rs 1000 per day and AC restaurants serving liquor.

As a result of this move, bills at restaurants that come under this tax ambit will go up by three per cent. Similarly, staying in guest houses, hotels and clubs is going to equally attract 5 per cent service tax. In this regard, it is mentioned that a restaurant which had the facility of air conditioning in any part of the establishment and had the license to serve alcoholic beverages is entitled to this tax.

However, the proposal also made it clear that in order to be taxable; the services should be provided in the premises of the restaurant, thus bringing some cheers to travelling and corporate executives. If food is being served in the hotel room, service tax could not be charged under the restaurant service. But if the services are provided in other parts of the hotel, like a swimming pool or an open area attached to the restaurant, they are liable to service tax as these areas become extensions of the restaurant.

Need for Service Tax

Service Tax is an indirect tax imposed on specific services. Taxable services are specified in Section 65(105) of the Finance Act, 1994.  It cannot be levied on a service which is not included in the list of taxable services. Over the past few years, service tax has been expanded to cover new services. A service tax is levied to reduce the degree of intensity of taxation on manufacturing and trade without forcing the government to compromise on the revenue needs.

However, the budget proposal to impose service tax on air-conditioned restaurants has not been a welcome move for everyone. The proposal specifically has met with stiff resistance from the hospitality sector. As pointed out by many restaurant owners, customers are already paying VAT on their bills and the additional tax would only amount to double taxation on their part and make eating out expensive. This would thereby affect their business as customers would avoid eating outside and prefer to order it from home. This would also mean loss of revenue for the government in one way.

But there are still many who are in favour as they think such a measure would help in reducing the fiscal deficit gap that is on a slight rise from the last couple of years. “Taxes are inevitable in a country like India. With widening fiscal deficits, you are bound to get taxed. I see no harm if you are taxed for the services you are being offered inside the restaurant premises,” opines Sanjay Coutinho, CEO, Barista.


The introduction of the new tax norms in the Union budget may have cheered up some, but it has failed to enthuse many.  The provisions are seen as an extension to the already prevalent high inflation and rise in cost of ingredients that restaurants are currently impacted with.  It has, according to many, added to their woes instead of coming to their rescue. In the words of Samir Kuckreja, CEO & Managing Director, Nirula’s, Taxation has always been a huge challenge for the restaurant sector and is going to cast its shadow on it forever. “But we have to live with it,” he concludes, “and this is going to change the entire landscape further with new policies coming into the picture.”


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