Complete Guide on Service Charge, Service Tax and VAT on Restaurant Bills

How many of us actually realize that we lose lots of bucks in paying added money on bills whenever we dine out at restaurants? Well, most of us fail to understand what service charge, service tax and VAT charges (levied by eateries) mean and how are they computed. It is assumed that the restaurant must have calculated the bill appropriately according to the rules set down. Consequently, we just pay up and leave without knowing whether the amount you paid was justified. It’s time we understand these 3 charges so the next time we eat out at a hotel or an eatery; the bill would not seem so confusing. Rather, we should speak up if we find something fishy.

Awaiting the bill……here it comes!

Habitually, we run down the bill amount in our mind before the bill actually arrives. This guessing game is completely thrown off the track as we failed to incorporate the different charges and taxes applicable on the bill. No wonder, the bill that arrives is roughly 20-30% more than expected. You relished a sumptuous dinner only to realise that the bill is not just for what you ate. Imagine eating worth Rs. 1000 and paying Rs. 1300 instead. Feeling bitter in the mouth already!

To make matters simpler, we will decode the charges included in the bills so you can get the correct idea how the bill is calculated. Looking at your eatery bills, you will find three kinds of expenses apart from the actual food bill. These are ‘service tax’, ‘service charge’, and ‘VAT’. Let us work them out separately and check what they are exactly:

  1. Service Charge

Every restaurant levies a ‘charge’ for the service they provide to the customers. This is called ‘Service Charge’. It usually amounts to 5%-10% of the food bill, though eatery owners can freely charge whatever amount they want as service charge. Check the menu to see the service charge billed by the restaurant before you make up your mind to dine there. It is mandatory for the hotels to mention the service charge in their Menu, only then they can charge the same in your final bill. If the hotel does not display it on the Menu, it implies that the service charge was not shared with you and thus, you cannot be charged for it.

In reality, service charge is a sort of an enforced ‘tip’ that would be divided among waiters and workers. That means if service charge has already been included in the bill, you can simply go ahead without having to tip to anyone. Don’t feel embarrassed for not giving the tip as you have already done it through service charge. Although most of the restaurants would never tell you this openly, but there are places where they make it quite clear in their menus itself. They mention the amount of the service charge that will be levied on the final bill and strictly prohibit you from tipping to anyone. Food tastes even better in the company of an ethically sound hotel!

Therefore, if your food cost was Rs 1,000 and the hotel levies a service charge of 5%, then your bill will now be of Rs 1,050.

  1. Service Tax

The most important thing about service tax that everybody should know is that only AC restaurants can levy service tax. If the restaurant does not provide AC (fully or partially), they are not liable to levy service tax whatsoever. This service tax reaches Government of India. Service tax is billed on the food bill plus service charge. Therefore, if your food bill is Rs 1,000, after 5% service charge (5% of Rs 1000), the sub total was would be Rs 1,050. Now, the service tax is calculated on Rs 1,050 (and not Rs 1,000).

The next important thing to take note of is the way service tax is computed. According to the set rules, service tax is applicable only on 40% of the bill sum, and not the entire amount. At present, the service tax is about 14%, so the final service tax you have to give is just 5.6% (14% X 40%) on the bill that includes service charge. 5.6% of Rs 1,050 will be Rs 58.80 and thus, your total sum after service tax comes to be Rs 1108.80. Several restaurants are found to unethically levy service tax on the entire bill amount. Sadly, most of the visitors pay as they are clueless about the right billing practice.

There have been some rumours in the past suggesting that service tax has to be given only on the service charge. It turned out to be a hoax and it was later clarified that service tax has to be paid on 40% of the bill amount including service charge. Keep away from such incorrect information!

  1. Value Added Tax- VAT

The State Government collects Value added Tax or VAT. This tax is applicable only on the food items which were cooked inside the eatery, as they ‘added value’ to the food items and then served it to you. Thus, be sure that you do not pay for packaged goods like water bottles, packaged foods, which were not cooked or prepared in the restaurant. We take a lot of packaged products while eating at a restaurant. In that case, VAT is not applicable on the final bill amount, but only on the cost of the consumed food items that were prepared in that restaurant.

Though VAT varies from one state to another, but normally it lies in between 12% to 15%. Usually, VAT is charged at 14.5% on non-alcoholic beverages and food items and VAT on alcoholic drinks and cocktails is charged at 5.5%. VAT has to be computed only on bill including the service charge. No eatery can charge VAT on the bill amount including service tax. Looking back at our bill example, we find that the bill after including service charge was Rs 1,050. Therefore, 14.5% VAT on this amount will come out to be Rs 152.25. Hence, your overall bill amount would be

  • Food Cost– Rs 1,000
  • Service Charge – Rs 50
  • Service tax (5.6% of 1,050) – Rs 58.80
  • VAT (14.5% of 1,050) – Rs 152.25
  • Total – Rs 1,261

26% higher bill as compared to the cost of the food consumed!

Now you can realize how different tax and charges inflate your final bill by 20-30%. So next time you go out for a meal, check the amount you pay to make sure if all charges and taxes are calculated appropriately as per the rules. And, don’t forget to enjoy your dinner!