GST on Restaurants and Food: Rules and Rates

India's tax system has evolved over time, and before the introduction of the Goods and Services Tax (GST), there were various direct and indirect taxes that had to be computed at every stage. Direct taxes were levied on personal income, while indirect taxes were collected through the purchase of goods and services. The previous tax system, which included Value Added Tax (VAT), excise duty, and import/export duties, was cumbersome to manage due to the multiple tax laws. The GST was introduced as a solution to streamline the taxation process.

Introduced on July 1, 2017, GST or Goods and Service Tax is the taxing system that has replaced all types of indirect taxes levied by the government on various goods and services. The intention behind introducing GST was to simplify the otherwise complicated taxing process and streamline the charging of taxes on products and services. Various goods and services are taxed at different rates in slabs of 0%, 5%, 12%, 18% and 28%.Now, you know GST is in application, and you know that GST has replaced all other taxes. However, at the end of a hearty meal with friends or family at a nice, cosy restaurant, you see that a bill includes a Service charge. Is that a tax? Should you pay it? Or is the restaurant trying to scam more money out of you?To answer the questions, we must understand the functioning and application of GST on the food industry first.

The food, restaurant and hospitality industry in India has been on a consistent rise and is only inclined to grow further. Increasing urbanization, tourism and rising standards of living have all but performed as catalysts for this ever-growing industry. And the more that people indulge in it, the more aware they become as they educate themselves further. Here’s a little knowledge nugget to make you more aware.Like most other products and services, the GST regime has its influence on food and hospitality too. On food items, GST can be 5%, 12% or 18% based on factors like location of the service provider, establishment, licences and more. While GST on a majority of the actual food material is nil-5% the GST on the provider of said food ranges based on the location or the room tariff if we talk about hotels.Broadly, the restaurants are classified under either slab as follows:

• Restaurants that don’t have an air conditioning system, the GST charged is 12%.
• For restaurants with air conditioning and a liquor licence, GST is charged at 18%.
• For the restaurants housed within 5-star hotels, the rate of GST applied is 28%.

Here’s a basic breakdown of the GST imposed on various food and hospitality services:

Before the introduction of GST, any bill would have several different indirect taxes charged on the amount, such as:VAT @ 12.5%Service Tax @ 15%VAT ITCFor example, on a restaurant bill of Rs. 3,000

GST has done a good job at combining VAT and Service Tax under one rate; but you might still find a tab on your bill mentioning a percentage of ‘Service Charge’ in your amount. Time for some clarification: Also Read: What Are the Required Documents For GST Registration?

What’s the difference then?

SERVICE TAX is a tax payable to the government, imposed on the services provided in restaurants. It is mandatory but is not mentioned separately on the bill anymore; the GST amount mentioned is inclusive of the service tax. SERVICE CHARGE , however, is an amount charged by the restaurant for the service they are providing. This amount goes directly to the restaurant. Under the current tax laws, are no specific guidelines on the limitation of service charge by restaurants.According to the Ministry of Consumer Affairs, Food and Public Distribution, the voluntary amount levied by the restaurant that the customers pay at their discretion is known as the Service Charge. Service Tax, on the other hand, is payable to the Government.The service charge is supposed to be an amount that is an optional payment on the part of the customer, like a tip; but most restaurants have made the service charge a compulsory payment too. However, guidelines issued by the Central Consumer Protection Authority (CCPA) in July 2022 prohibit restaurants from adding such charges by default or imposing a compulsion on the customer to pay them.The two terms being confused isn’t extraordinary as many customers are confusing service charge with service tax and questioning the restaurants on why they need to pay this extra amount after the implementation of GST. This still seems to occasionally anger customers, although the restaurateurs have made it clear that the service charge is not about increasing the profits, but for the betterment of the staff.

As for the final verdict on the matter, service tax and service charge are two different ideas serving different purposes. According to the law, Service Tax is now included under the GST amount and customers are not supposed to pay it separately. Service charge, though, is in the hands of the restaurant, and still very much applicable.