When you dine out at a restaurant, the following charges and taxes are normally levied on your food bill:
- Service Charge
This is a charge levied by the Restaurant Owners as payment for the Services rendered like serving the food etc. This Charge is not levied by the Government Of India and is collected by the Restaurant Owners themselves. This charge is optional on the part of the Restaurant and they are free to charge any amount as Service Charge after making proper disclosures in the Menu Card.
Different Restaurants levy different Service Charges although it is normally in the range of 5% to 10%. Some Restaurants levy Service Charge only for dine-in customers and not for Takeaway or Home-Delivery Customers. Levying service Charge is entirely at the sole discretion of the Restaurant Owner and they are free to levy any amount as Service Charge.
- Service Tax
When you go to a Restaurant, you not only go there to eat food but also avail of various amenities and hospitality services. The Cost of Food as shown in the Menu Card is a composite charge and includes not only charges for the Cost of Raw Material but also for the Cost of the Services rendered. And as these Services are being rendered, the Centre Government Of India collects Service Tax on the Services rendered.
Service Tax is levied on all air-conditioned restaurants. As per this Rule, abatement has been allowed for the levy of Service Tax on the Food Served in Restaurants, which says that Service Tax should be charged only on 40% of the Food Bill (including Service Charge) and not on the Total Bill. Or in other words only 5.6% Service Tax on Restaurant (i.e. 40% of 14%) shall be chargeable. The Computation of Service Tax has been explained below with the help of an example. For the purpose of simplification, VAT has been presumed at 14.50% on the Total Food Bill. However, in case the food is not being served in a restaurant and is being served as part of outdoor catering, service tax should be levied on 60% of the Total Bill.
VAT is Value Added Tax levied on the sale of any item. As food is being sold in a restaurant, VAT is liable to be paid on such sale. VAT is levied by the State Govt and is at the sole discretion of the State Govt. Different States prescribe different rates of VAT. Moreover, even in the same state, different Rates of VAT have been prescribed for different items. The Rate of VAT is different for Alcoholic Beverages and different for other food items.
VAT Laws specifically state that VAT Rate is to be applied on the Total Food Bill (inclusive of Service Charge) i.e. 14.5%.
In order to understand it better, look at the complete breakdown of charges on a sample food bill,
Therefore, if your Food Bill already considers the Service Charge, you should not be tipping at all.
On the same note, watch this hilarious video which explains why tipping should be banned for good.