Decision after discrepancies in account books of hotels, restaurants.
New Delhi: Hotels and restaurants will now have to pay Income Tax on the services charges they impose on consumers.
The decision to approach the Central Board of Direct Taxes (CBDT) with this directive was taken after the consumer affairs ministry observed that a majority of hotels and restaurants charging service charges do not reflect the same in their account books and thus evade paying Income Tax. A top ministry official told this newspaper that the ministry decided to write to the CBDT after it found that a large number of eateries and even salons were imposing service charges and had even written at their entrances that consumers will compulsorily have to pay service charges at these places.
“We also found that the service charges collected were never included in the account books and thus this is almost like an untaxed profit for these outlets,” the official said.
Officials said that the directive on paying Income Tax on service charges would be incorporated as part of the rules of the new Consumer Protection Bill which would be put before the Cabinet and would be introduced in the coming Winter Session of Parliament.
The practice followed across the world is that any service charge collected is distributed among the staffers. But in most cases in India, this is not done. In fact, most staff members of restaurants in India are not even aware of this.
The consumers thus end up paying both the service charge as reflected in the bill as well as tip the staff.
The consumer affairs ministry, led by Ram Vilas Paswan, had brought attention to the fact that service charge should be voluntary for consumers last year itself. Following this, the three largest hotel owners association in the country had held meetings with the ministry and had agreed to make it voluntary.
A directive was also sought from the Prime Minister’s Office which responded by saying that it should be made mandatory for hotels and restaurants to either leave the service charge part vacant in the Bill or mention that it was voluntary.