Due to the various taxes applied people tend to get confused. Take a look at the various taxes and its implications on your bill.
Usually, 10 per cent of the total bill amount is considered as a tip and is charged in the form of a service charge. In such cases, if you feel obliged you can add more, but, remember you have alreday tipped through the service charge.
Restaurants would charge you a tax for the services offered called service tax. Service tax is 12.36% including cess. The Department of Revenue's service tax guidebook mentions that service tax for restaurants with air-conditioning facilities, would be levied at 40 per cent of the total billed, subject to service tax.
Therefore, the total price for food, beverages and any service charges added on the invoice, are taxable at 4.94 per cent (equivalent to 40 per cent of the current service tax rate of 12.36 per cent).
Value added tax or VAT has always been a little confusing. Remember that VAT is added only on the service charge and not on the total bill amount.
No VAT should be charged on items like packaged drinking water, soft drinks and other packed food items. VAT varies from state to state depending on the food prices which is paid to the state government.
Let me give an example.
Food = Rs. 1000.00
Service Charges @ 10% = Rs. 100.00
Service Tax @ 4.94% = Rs. 54.34 (on F&B + Service Charges)
VAT @14.5%(food+service charge) = Rs. 159.5
Total = Rs. 1313.84
Service Tax can be charged ONLY for the services provided to the customer. Now, see what is happening here in the above example. Service Tax should be charged only on the Service Charge amount i.e Rs.100 ONLY, and not on the entire amount. In the example provided, the customer should be charged only Rs 4.94, whereas he has been charged Rs. 49.00 extra.
However, there is ambiguity and people need more clarification on this. In this Budget 2013, service tax was implied on eating at air-conditioned restaurants. Earlier, 12.36% was applicable on 40% of the bill at air-conditioned restaurants which had a licence to serve liquor.