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According to FinMin, restaurants may impose GST on service fees.

A provision in law permits restaurants to levy GST on service charges, the Finance Ministry said in the Lok Sabha on Monday. This indication has come even as a dispute on legality of service charges is being litigated in the Delhi High Court.

AKP Chinraj, Member of Parliament from Tamil Nadu, asked whether restaurants are entitled to charge GST on service charge voluntarily paid by the customer and also whether the GST Council or the Government has given any permission for such levy..

Responding to him, Minister of State for Finance, Pankaj Chaudhary, said as per Section 9 of the CGST Act, 2017, GST is levied on supply of goods or services on the value as determined under Section 15 of the CGST Act, 2017. “According to Section 15 of the CGST Act, 2017, any amount charged by the supplier for anything done by the supplier in respect of supply of goods or services forms part of the value of service,” he said, indicating that GST can be levied on service charge.

Most restaurants collect service charge at a certain rate and add to the value of foods supplied. Then, GST is levied on the gross amount. Supply of restaurant service other than at hotels/premises having room tariff above ₹7,500, is taxed at the rate of 5 per cent without Input Tax Credit (ITC) and supply of restaurant service at hotels having room tariff above ₹7,500 per day is taxed at 18 per cent with Input Tax Credit (ITC).

There have been disputes over service charges as many customers feels it is a tax. However, money collected through service charges goes to the cash box of restaurants which they claim is distributed to all the workers of restaurants as part of welfare measures. Restaurants also say they print the service charge rate on the menu and also put a board on the applicability of the charge.

CCPA guidelines

However, in July last year, the Central Consumer Protection Authority (CCPA) issued guidelines saying that service charge is levied in addition to the total price of the food items mentioned in the menu and applicable taxes, often in the guise of some other fee or charge. Further, it may be mentioned that a component of service is inherent in the price of food and beverages offered by the restaurant or hotel. Pricing of the product thus covers both the goods and services component.

“There is no restriction on hotels or restaurants to set the prices at which they want to offer food or beverages to consumers. Thus, placing an order involves consent to pay the prices of food items displayed in the menu along with applicable taxes. Charging anything other than the said amount would amount to unfair trade practice under the Act,” the Authority said.

The guidelines were challenged in the Delhi High Court, which stayed the order on July 20 following which various restaurants are levying service charges according to a framework designed by the Court.  The government filed an application for lifting the interim stay. In the last hearing on February 15, the Court said if the main matter is not heard on the next date, which is April 12, the applications for vacating the interim stay shall be considered by the Bench.

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