Service charge not distributed to workers by restaurants liable to income tax: CBDT

NEW DELHI: Restaurants and hotels imposing service charge on customers in the name of tips but not passing them full to their employees could court trouble from taxmen. Central Board of Direct Taxes, the apex direct taxes body, has directed its field officials to examine balance sheet and expenditure statement of restaurants and hotels in cases where there is any under-reporting or non-reporting of additional income collected in the name of service charge.

The CBDT has said wherever it is found that the service charge receipts have not been passed on to the staff or there is some under-reporting or non-reporting of receipts, it should be duly brought to tax.

“While framing assessments or carrying out verification under provisions of the Income Tax Act, 1961, in case of hotels and restaurants it is necessary to examine whether there is any under-reporting or non-reporting of additional income collected in the name of service charge,” it said in a circular.


Service charge is supposed to be in the nature of ‘tips’ for hotel or restaurant staff and is sought to be collected on their behalf. But there have been reports of some restaurants and hotels not passing it to their staff. Service charge is not taxable and the amount of service charge levied is entirely at the discretion of restaurants and hotels. Usually, the rate is 10% and it is mentioned on the menu.

This follows a clarification by the department of consumer affairs in April 2017 that service charge levied by restaurants and hotels is ‘voluntary’ and customers can refuse or pay according to their wish.

Subsequently, minister of consumer affairs, food and public distribution Ram Vilas Paswan had tweeted on September 12, 2017: “in view of the seriousness of issue, department of consumer affairs has written to CBDT to consider inclusion of service charge while assessing tax”.

Tax experts say industry will have to be prudent now in their treatment of the levy. “Such taxpayers would now have to act prudently by either eliminating such levy on the total bill or passing on its effect to the hotel/restaurant’s workers,” said Suraj Nangia, partner at Nangia Advisors LLP.

Vikas Vasal, national leader tax at Grant Thornton India LLP, said from a commercial perspective, as this is not a government mandated levy, consumers should have an option to pay the same depending upon their overall experience and the services received. “From a tax perspective, it may be prudent for the government to clarify its position for the employer and the employee, as well as under GST to avoid unnecessary dispute and litigation.”

Amit Maheshwari, partner at Ashok Maheshwary & Associates LLP, said, “One has to see if this would result in higher tax revenues, since even currently non-payment of tips to staff in spite of collecting them increases profit and consequently the taxes. We expect a tighter tax scrutiny of the industry.”