ST & DVAT on Food Part-3

SERVICE TAX ND DVAT ON FOOD & BEVERAGES SERVED IN RESTAURANT, BANQUET ETC.   

PART-3

Purpose of this blog

In this blog we'll discuss various aspects of taxation (Service Tax and DVAT) and case laws in relation to serving/supply of food or/and beverages in restaurant etc. to casual customers without providing lodging and boarding facility i.e. only food etc. is provided and no residential facility.

A brief about the nature of activity of serving of food in restaurant

When we are going to any restaurant for eating the food etc. then we are not just purchasing the food but also utilising various services like use of furniture, use of Air Conditioner, serving facility by waiter etc. Now the question which always been a matter of conflicts is "Is this a contract of supply of food and services are incidental thereto or this a composite contract for supply of food and providing of services ?" and reason for this is that on supply of food etc. VAT/Sales tax is applicable and on Service portion Service tax is applicable.

By 46th amendment to the constitution serving of food is considered as deemed sale. Relevant text of Article 366 (29A)  is " tax on sale or purchase of goods includes- ..............(f) a tax on supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating), where such supply or service, is for cash, deferred payment or other valuable consideration.... and such transfer, delivery or supply of any goods shall be deemed to be a sale of goods by the person making the transfer, delivery or supply and such a purchase of those goods by the person to whom such transfer, delivery or supply is made".  So as per constitution of India transfer, delivery or supply of any goods shall be deemed to be sale and consequently vat/sale tax will be charged on value of goods ( food etc.) transferred, delivered etc. A point to be noted that only value of goods transferred etc will be deemed to be sale and not service part. So if value of goods and value of service part can be determined separately then vat/sales tax will be levied on value of goods only.

First this activity is taxed under Service tax by Finance Act,2011 by inserting clause (zzzzv) under in Section 65 (105) of Finance Act,1994. As per this clause "taxable service means any service provided or to be provided to any person, by a restaurant, by whatever name called, having the facility of air-conditioning in any part of the establishment, at any time during the financial year, which has license to serve alcoholic beverages, in relation to serving of food or beverages, including alcoholic beverages or both, in its premises."

Now under new negative list concept of Service tax, this type of activities are covered under "Declared Service". As per Section 66E (i) of Finance Act,1994  "The following shall constitute declared services, namely......service portion in an activity wherein goods, being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as a part of the activity". 

There are many case laws to analysing constitutional validity of levying service tax on this activity, which we'll discuss in brief at last of this blog. First let us go through various provisions of DVAT and Service Tax on this.

DVAT provisions regarding activity of serving of food etc. in restaurant

Applicability of DVAT on serving of food: as per Sec 2 (zc) (vii) of DVAT Act sale includes this activity hence DVAT is leviable on this. Other than this there is no provisions for valuation etc. specifically for this activity. So normal provisions will apply. DVAT will be charged on value of goods ( and if separate value can't be determined then on total value) at the rates mentioned in the schedules and if composition scheme is opted then as per composition scheme.

Service Tax provisions ( under negative list approach)regarding activity of serving of food etc. in restaurant

Applicability of Service Tax on serving of food: Now under new negative list concept of Service tax, this type of activities are covered under "Declared Service". As per Section 66E (i) of Finance Act,1994  "The following shall constitute declared services, namely......service portion in an activity wherein goods, being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as a part of the activity". 

Taxable value for Service Tax: As per Section 67 of the Finance Act,1994 Service Tax will be charged on gross value received in money plus fair market value of consideration received in kind, and if consideration is not ascertainable then value will be determined in prescribed manner. As per Rule 2C ( as amended wef 01.07.2012) of the Service Tax ( Determination of Value) Rules, 2006 Value of service portion in this activity will be 40% of the total amount charged for such supply. So if value of service portion is ascertainable service tax will be charged on such value otherwise on 40% of gross value charged for supply of food etc.

Exemption under Service tax - Exemption for this activity has been provided in serial No.19 of Notification No.25/2012 dated 20.06.2012 . 

Till 31.03.2013- exempt if restaurant, eating joint or mess, do not have AC or central heating in any part of the establishment at any time during the financial year and/or license to serve alcoholic beverages.

From 01.04.2013- exempt if restaurant, eating joint or mess, do not have AC or central heating in any part of the establishment at any time during the financial year .

So upto 31.03.2013 service tax is applicable only if any restaurant etc. have both - AC or central heating facility and license to serve alcohol. From 01.04.2013 service is applicable if any restaurant having AC or central air-heating. ( condition of license to serve alcohol has been removed/deleted wef 01.04.2013).