CA, Designated Partner, ACA, M.com
The restaurant industry defines "Service Charge" as a fee that is levied over and above the price of the food and drink for the additional convenience of serving inside a restaurant. They also emphasize that it is an internationally accepted best practice.
As per the GST law, GST will be charged on the 'transaction value'. Transaction value is the price actually paid (or payable) for the supply of goods/services between un-related parties (i.e., price is the sole consideration).
Section 15(2)- CGST Act 2017
As per the Clause (c) of Section 15(2) of Central Goods and Services Tax Act, 2017 provides that "(c) incidental expenses, including commission and packing, charged by the supplier to the recipient of a supply and any amount charged for anything done by the supplier in respect of the supply of goods or services or both at the time of, or before delivery of goods or supply of services;"
The above clause can be divided into two parts i.e.
- Incidental expenses, including commission and packing, charged by the supplier to the recipient of a supply.
- Any amount charged for anything done by the supplier in respect of the supply of goods or services or both at the time of, or before delivery of goods or supply of services.
As per the second part of the said clause, any amount which is collected by the hotel/restaurant thus it forms part of price collected by the hotel/restaurant, therefore it has to be included in the transaction value.
Further according to GST law, the value of a supply of goods or services or both will be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related, and the price is the sole consideration for the supply
PRACTICAL SCENARIOS IN THE SIMILAR INDUSTRIES
1. If you order from a food aggregator and if the packing and delivery charges are separate, then GST is payable on that
2. For online travel booking, if you are paying convenience fee to airlines, there is a GST on that fee as well
EXTRACT OF CBIC FAQ
Ques: Will service charge, as charged by some restaurants, be treated as consideration for a supply and hence considered liable for tax?
Reply: There is no distinction between goods or services under GST. Service charge like any other supply will be leviable to GST. It is also clarified that service charge is not a statutory levy. It is not levied by the Government.
RELEVANT CASE LAWS
1. Hon'ble Bombay High Court in the matter of Sun-N-Sand Hotel Private Ltd. v. State of Maharashtra on 2 December, 1968,
Held: Once the service charges are mandatorily payable by the customer then it difficult to dissociate this part of the bill from the total contract which a customer enters with the assessee when ordering any food.
Therefore, service charges in such case would be treated as part of transaction value and thus tax would be leviable thereon.
2. Legal decisions for inclusion of service charges in the transaction value: Sun-N-Sand Hotel (P.) Ltd. v. The State of Maharashtra on 2 December, 1968:-Hon'ble Bombay High Court in the given matter upheld that
Held: "16. In view of the conclusion which we have arrived at that the 10 per cent of the service charges charged to the customers are properly included in the sale price."
3. Madras High Court in the matter of Hotel Ashoka v. The State of Tamil Nadu on 28 October, 1976 Equivalent citations: 1977 40 STC 347 Mad
Held: "If we may say so, with respect, we entirely agree with the above reasoning and conclusion of the Bombay High Court. In view of this, we are of the opinion that the conclusion of the Tribunal in this case in including the service charges in the taxable turnover of the assessee is correct."
The "Transaction Value" definition in GST is wide enough to cover service charges. GST must be levied on any supply of goods or services which will also include delivery charges, packing charges or services charges, if any.
GST should be levied on service charge, if it is part of the total bill, as rules make it clear that any fee or charge, until exempted, will be taxable.