The tax dept’s crackdown comes after the ministry of consumer affairs flagged its concerns
NEW DELHI: The income tax department has asked its officers to scan the accounts of restaurants to make sure that service charges collected by them are taxed as income, if these are not passed on to their employees.
The tax department on Monday instructed field officials to verify, as part of its regular tax assessment of hotels and restaurants, if there is any under-reporting or a total lack of disclosure of income collected as service charge.
Officials were asked to closely examine the disclosure made in financial statements about the amounts collected as service charge, as well as details of its disbursal to employees, a person familiar with the development said on condition of anonymity.
The tax authorities’ move to take a long, hard look at whether hotels and restaurants are enriching themselves with the service charge amount comes after the ministry of consumer affairs flagged its concern.
The ministry informed the tax department that many restaurants arbitrarily decide on service charges, rather than giving customers the option to tip the servers. The ministry also said that such amounts collected by eateries are likely to be retained by them rather than being distributed among the staff.
Mint has reviewed a copy of the instructions, which say that if it is found that the service charge amount collected from consumers is not passed on to the staff, it should be taxed towards the restaurant or hotel.
Industry representatives said the move would encourage fair play. “The CBDT circular strengthens the position of legit restaurant operators, who have been recognizing service charge receipts as part of their turnover and disburse it across the entire staff pool. This initiative will prevent misuse by exposing the unscrupulous,” said Rahul Singh, president, National Restaurant Association of India.
In April, the consumer affairs ministry had clarified that an element of service is inherent in the supply of food by hotels and that charging anything beyond the price mentioned in the menu and applicable taxes without the customer’s consent is unfair trade practice. The ministry had then also asked restaurants to display that service charge is voluntary.
Restaurants had earlier come under the scanner of tax authorities after consumers pointed out that they did not pass on the benefit of input tax credit in the goods and services tax (GST) regime. That led to the GST Council withdrawing the credit benefit to restaurants and lowering the tax rate on eateries to 5% from 15 November 2017.