MUMBAI: Some restaurants collect service tax from customers against home delivery or takeaways, primarily to protect themselves from litigation, but tax experts say such forms do not involve any element of service and no service tax should be collected.

Next time you order a pizza from a well-known chain or paneer tikka from your neighborhood joint and have it delivered to your home or office, be sure to check the bill again. Chances are you may find that while one restaurant has levied service tax, another has not.

To illustrate: If your home delivery order is of Rs 1,500 and the restaurant has decided to levy service tax, you will end up paying Rs 1,584. Service tax is charged on 40% of the customer’s bill, which at the current tax rate of 14% brings the effective tax rate to 5.6% (or Rs 84 in this case). This sum of Rs 84 is not pocketed by the restaurant but is collected by it and passed on to the government.

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Tax experts view that a bill for home delivery of food or a takeaway should not include any service tax. Explains Sunil Gabhawalla, chartered accountant and indirect tax expert: “While introducing service tax on restaurants in 2011, the government issued a clarification that the service tax levy is intended to be confined to the value of services contained in the composite contract and shall not cover either the meal portion in the composite contract or mere sale of food by way of pick-up or home delivery.”

“Though not legally required to, some restaurants do levy service tax, even on takeaways or home deliveries, for various reasons. Unless the restaurant has a strong back-end record maintenance process, it becomes practically difficult to substantiate during an indirect tax audit, which portion of the revenue earned was via takeaways. The risk of litigation tempts some restaurants to levy service tax even when the meal is not served in-house. Also, in cases where restaurants levy service tax they do get a Cenvat credit, which they can use to offset indirect taxes they have to pay, thereby benefitting to an extent, in the process,” adds Gabhawalla.

Last month, a deputy commissioner based in Chandigarh clarified in writing to a query raised by a local restaurant that service tax is not liable on takeaway or home deliveries, as no service element is involved. Such deliveries made free of cost are in the nature of sale of meals rather than a service. “The dominant nature of the transaction is that of sale and not service as the food is not served at the restaurant and further no other element of service which is available at the restaurants, be it ambience, live entertainment if any, air-conditioning or personalized hospitality is offered,” the written clarification stated.

This clarification, which has caught the attention of customers, has prompted the National Restaurant Association of India (NRAI) to again seek a written clarification on the applicability of service tax on various formats including home delivery, from the finance ministry.

In 2011, service tax obligations were confined only to those restaurants which had a liquor permit. Since 2013, this criteria was dropped and all restaurants which had air-conditioning or central air heating (even if partial) were required to levy and collect service tax, thus a large number of restaurants became ‘service tax collectors’.

“Based on earlier discussions with CBEC officials in 2013, we informed our members that service tax was applicable to all formats – including home delivery and take away. We did not want our members to contravene any law. Even then, we had requested for written clarifications,” says Prakul Kumar, secretary general, NRAI. This association has a diversified pan-India membership of more than a thousand, including large restaurant chains as well as owners of single restaurants.

“It would help both the restaurant industry and the customers if the finance ministry issued a notification or circular on this issue at the earliest,” adds Kumar.

