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An overview of the taxes and charges billed in restaurants

Puzzled over arbitrary numbers in your restaurant bill? Lavanya Mohan gives the lowdown on what to expect when you order.

August 14, 2015 07:51 am | Updated March 31, 2016 02:23 pm IST

Here’s a situation most of us are familiar with - you’re wrapping up a great evening out with friends at the city’s newest restaurant when the bill arrives, and the figure isn’t anywhere close to the estimate that you had in mind - it is when you scan the bill that you notice the various taxes and charges that have been slipped in to the total.

  Service Charges

I was once told that the reason service charges came into existence was because the kitchen staff was very unhappy about the fact that that it was the waiter who got to take the tip when it was their food that made the diner happy! While I have no means of verifying this story, the only takeaway from it is the fact that service charges are not taxes that are mandated by the Government, but instead, have been raised on your bill by the restaurant.

This amount that is collected is later distributed in an organised manner among the kitchen and support staff of the restaurant. If the service charge has been mentioned in the menu, there is no disputing it - however, if there is no mention, you should be able to question the restaurant about the same. Since the restaurant charges them, there is no real consistency with respect to the rate of service charges, but it is safe to assume a rate of around 7% to 10%. If your bill has a Service Charge, you don’t have to bother leaving behind a tip.

  Value Added Tax

Value Added Tax is liable to be paid when an existing item undergoes processes which “add value” to it, and modify it into something else. As far as restaurants are concerned, raw vegetables, fruits, spices, and pastes are cooked into a meal, and therefore, VAT becomes chargeable. If you are presented with an item that hasn’t undergone modification, like a can of coke, you’re not liable to pay VAT on it. If you’ve ever wondered why some establishments take the trouble of pouring the can of coke you ordered into a separate glass and pop a piece of lemon in, this could be why!

VAT varies from state to state, but in Tamil Nadu, it is 14.5%. You may have noticed that some restaurants charge 2% or 4% - this is an option that some restaurants choose to make their accounting and tax administration easier. Those restaurants that opt for this rate also have to compromise on some tax set-off benefits, so you will not see too many fine dining restaurants charging the lower rate.

  VAT on Liquor

If you’ve ever been to restaurant that also serves alcohol, you would have noticed three different types of VAT on your bill. This is because one pertains to food, another to domestic liquor, and the third, to foreign or Indian made foreign liquor. VAT on food is the usual 14.5%, as is VAT on domestic liquor. VAT on imported/Indian made foreign liquor, however, is a whopping 58% - that’s why the cocktail which seemed harmless on the menu, packs a whole different punch when your bill arrives. The only way to save on this is to ask the support staff what domestic liquor they have - if this isn’t a case for “Make in India”, I don’t know what is!

  Service Tax

The last tax that you’ll encounter is Service Tax, which is to be levied only in the case of “air-conditioned or air-heated restaurants”. There is some confusion that surrounds Service Tax - many people are of the opinion that it’s payable only on the service charge, but it isn’t so. It is payable on the total of the food, drink and service charges. The rate of Service Tax however, varies – Service Tax is charged at 5.6% on food and drinks (essentially, those items on which VAT is also charged), and the full rate of 14% on the service charge component.

Eating out is supposed to be a pleasurable experience – make sure it remains that way by making your estimations of cost before you head out.


This article has been edited for a factual error.

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