Asked to pay VAT while dining out? Understanding restaurant bills post GST

The Goods and Services Tax (GST) is touted as an unparalleled tax reform impacting sectors across the economic spectrum and bringing in immense benefits to stakeholders and consumers. For the common man, what draws attention is the impact of the tax on the bills he or she encounters in his or her daily life, the dining or restaurant bill being one such example. 

Evidence of the same was seen on social media, which was flooded with selfies of the first mithai bills, restaurant bills, café bills, etc showing the new tax being levied as on July 1, 2017.

This radical change, which subsumes a plethora of indirect taxes, has impacted the restaurant business as well, something every diner is inquisitive and talking about. 

Under the erstwhile indirect tax regime, the restaurant sector was burdened with multiple state and central taxes, charges, and various cesses. On every food and beverages bill, a diner used to pay value added tax (VAT), service tax, various cesses like Swatch Bharat, Krishi Kalyan, and a service charge. 

The typically applicable VAT rate was between 12.5 to 14.5 per cent and service tax, including cess, was applicable at the rate of six per cent (i.e. 15 per cent on 40 per cent abated value of food). Thus, the total indirect tax on dining was around 18.5 to 20.5 per cent, varying from state to state. 

With the implementation of the GST, all these taxes and cesses have been subsumed under the new regime. Now, a diner’s bill should simply show only GST.  Also, under the new system, eateries are broadly divided into two categories: Non-AC and AC restaurants. Dining out in air conditioned restaurants will attract a tax of 18 per cent, while non-AC restaurants (without a license to serve liquor) will levy 12 per cent GST on a food and beverage bill. 

But is it that simple? The answer is no. Let us discuss some exciting points now.

While everyone is calling GST 'one nation, one tax', the aam aadmi does not know that this one tax actually comprises two constituents – Central GST (CGST) and State GST (SGST) – in equal proportions. Why two taxes on the same bill? Since we are in a state, it should be only SGST. Why is CGST being levied, why is my restaurant bill in Chandigarh showing a new tax UTGST (Union Territory GST), etc? The answer is simple: While GST is one tax, it has two parts called CGST and SGST/ UTGST (levied in equal proportions). One that goes to the respective state/Union Territory and the other that goes to the central government.  

Further, alcohol for human consumption has been kept outside the ambit of GST. This means that in your dining bill, apart from the new levy of GST, you may still see the old tax (VAT) mentioned. The natural question is that which tax is applicable on what portion of the dining bill. Does VAT need to be paid on GST or vice-versa and do we need separate bills, etc? An incorrect interpretation of provisions by some restaurants and the lack of adequate publicity might be giving the diner the wrong impression that he or she is being cheated as both the taxes – VAT and GST – are being imposed. 

The truth is that VAT is applicable only on the alcohol component of the bill and GST is applicable on the food portion. Also, none of the taxes should be applied to each other.

A large segment of consumers believes that the service charge appearing on the dining bill is a component of indirect tax. However, the service charge is not a tax. It is an income for the restaurant that is in the nature of a tip or gratuity paid by a customer for hospitality received by him or her. This component of the food bill has not been impacted by the implementation of the GST and would continue to plague diners. To the government’s credit, they had released an advisory specifying that diners could refuse to pay this component to the restaurant if they choose to do so. 

Though the mention of multiple taxes (CGST, SGST/ UTGST, VAT on alcohol) and service charge on a restaurant bill is still creating anxiety among diners, in summary, the advent of GST is likely to increase the appetite of the diners at the restaurants. This is because sooner rather than later, restaurants are likely to pass on the benefit of overall reduced tax rates and the availability of smooth input tax benefit to their diners, allowing them to consume more at the same price. 

The author is a partner (indirect tax) at KPMG in India