How is Service Tax and Service Charge calculated in Restaurants ?

A typical restaurant bill has the items which you have ordered and their prices. Then there is service charges, service tax and value added tax as well.

“Service charge is not the same as service tax. Service charge is the amount you pay for the service of the establishment and it goes into their pocket,” said Anil Rego, chartered accountant and CEO, Right Horizons, an investment advisory and wealth management firm.

The following example will illustrate the tax calculation.

Total for food items is: Rs 865

Service charge (5%): Rs 43

Sub total: Rs 908

Service tax is 12.36% of 40% of Rs 908.

40 percent of Rs 908 is Rs 363.20

12.36% of Rs 363.20 is Rs 44.89.

So the service tax to be charged is Rs 44.89.

Grand total (after rounding off) = (Sub total + Service tax) = (908 + 44.89) = Rs. 953

The most important thing to remember is that service tax is not charged on VAT. The restaurant might cheat you by charging you a service charge, even when it’s not mentioned in the menu. Or, they might cheat you by charging a service tax which includes VAT as well. Or they might collect a service tax but calling it service charge and cheat you as well as the government.

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