'Charge collected by certain hotels is not service tax'

Some restaurants and hotels have been taking customers for a ride by billing them an extra amount as 'service charge' and passing it off as service tax .

The finance ministry on Tuesday clarified that service charge collected by certain restaurants and hotels is not service tax. In a statement, the ministry said that some hotels, restaurants and eateries, besides charging for the food and beverages, are also levying service charges which are retained by them.

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Some consumers have the misconception that these service charges are being collected by the restaurant on behalf of the government as tax, it added. "It is clarified that these 'service charges' collected by the restaurants, hotels or eateries are retained by them and are not 'service tax' imposed by the government," the ministry added.

In case of air-conditioned eateries and hotels, service tax is charged at the rate of 14 per cent but only on 40 per cent of the total bill amount. The effective service tax rate in respect of services provided in relation to serving of food or beverage by a restaurant, eating joint or mess having the facility of air conditioning or central air-heating in any part of the establishment works out 5.6 per cent of the total amount charged.

Besides AC restaurants and hotels, other services that have turned costlier because of the higher tax rate include phone tariffs, airlines, banking, insurance, advertising, architecture, construction, credit cards, event management and tour operators.

Union finance minister Arun Jaitley had proposed to raise the service tax rate to 14 per cent to facilitate a smooth transition to the goods and services tax (GST) regime, which the government wants to roll out from April 2016. Once implemented, GST will subsume service tax, excise and other state levies. Although rollout of GST has been delayed as states have reservations on certain issues, the government has been gradually calibrating tax rates towards the planned GST rates so that transition becomes smoother.