23/02/2015

Valuation of Supply of Food Services

Summary VALUATION OF SUPPLY OF FOOD SERVICES
TAXABLE SERVICE FOR SUPPLY OF FOOD
Service portion in supply of food any other articles of human consumption of drinks is taxable under section 66E(i) of the Finance Act 1994 as amended by Finance Act, 2012 w.e.f. 1.7.2012

Service portion in an activity wherein goods, being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as a part of the activity is a declared service.

It may be noted that definition of service in section 65B(44) contains an exclusion in clause (1A) in relation to transfer, delivery or supply of goods which are deemed to be sale under clause 29A of Article 366 of the Constitution.

SERVICES COVERED / EXEMPTED
Although services provided by any kind of restaurant are covered in this entry, the emphasis is to levy tax on services provided by only such restaurants where the service portion in the total supply is substantial and discernible. Thus, the following category of restaurants are exempted-
·         Services provided in relation to serving of food or beverages by a restaurant, eating joint or a mess, other than those having the facility of air-conditioning or central air-heating in any part of the establishment, at any time during the year, and which has a license to serve alcoholic beverage. The condition of bar license has been omitted w.e.f. 1.4.2013.
·         Below the threshold exemption

 The following activities are illustrations of activities covered in this entry:- 
·         Supply of food or drinks in a restaurant;

·         Supply of foods and drinks by an outdoor caterer.


VALUATION
 In order to ensure transparency and standardization in the manner of determination of the value of such service provided in a restaurant or as outdoor catering a new rule 2C has been inserted in the Service Tax (Determination of Value) Rules, 2006 w.e.f. 1.7.2012 by the amendment rules of 2012.


The value of service in this case shall be determined as per Rule 2C of the Service Tax (Determination of Value) Rules, 2006. In terms of the said rule, value of the service portion shall be determined in the following manner:-


Value of service portion…..
Shall be ….. percentage of the total amount charged
In a restaurant
40
By an outdoor caterer
60



‘Total amount’ (referred to in the second column of the table above) means the sum total of gross amount charged and the fair market value of all goods and services supplied by the service receiver in or in relation to the supply of food or any other article of human consumption or any drink (whether or not intoxicating), under the same contract or any other contract, less (i) the amount charged for such goods or services provided by the service receiver; and (ii) the value added tax or sales tax, if any, levied to the extent they form part of the gross amount or the total amount, as the case may be.


In Hotel Scandic Gasaback AB v. Riksskatteverket 2005 (1) - EUROPEAN COURT OF JUSTICE, where the assessee was running hotel/restaurant and providing meals at concessional rate to its employees, it was held that taxable amount for supply of services is consideration actually received. It is irrelevant whether price paid is higher or lower than cost price. 

ABATEMENT
Vide Notification No. 26/2012-ST dated 20-6-2012, w.e.f. 1.7.2012, abatement @ 30 per cent is available from value of taxable service in respect of supply of food or any other article of human consumption or any drink, in a premises together with renting of such premises, including hotel, convention center, club, pandal, shamiana or any other place specially arranged for organizing a function together with renting of such premises provided that cenvat credit on any goods classifiable under Chapter 1 to 22 of Central Excise Tariff Act, 1985 used for providing taxable service has not been taken.

EXEMPTION FROM SERVICE TAX
Following services are exempt from levy of Service Tax vide Notification No. 25/2012-ST dated 20-6-2012 - 

a). serving of food or beverages by a restaurant without bar license and without facility of air conditioning. (The condition of bar licence has been withdrawn w.e.f. 1-4-2013). 

b). services provided to educational institutions by way of catering under a Government sponsored centrally assisted mid-day meal scheme. 

c). services provided is relation to serving of food or beverages by a canteen maintained in a factory covered under the Factories Act, 1948, having the facility of air-conditioning or central air heating at any time during the year (w.e.f. 22.10.2013). 

Vide Order No. 1/1/2013 dated 17.09.2013, Central Government has granted an ad-hoc exemption to following services provided in the State of Uttrakhand from whole of Service Tax - 
(i) Services by way of renting of a room in a hotel, inn, guest house, club, campsite or other commercial place meant for residential or lodging purposes; 

(ii) Services provided in relation to serving of food or beverages by a restaurant, eating joint or mess. 

However, it may be noted that this exemption was in force for the period from 17/09/2013 to 31/03/2014.

CENVAT CREDIT
So far as Cenvat Credit is concerned, in terms of the Explanation 2 to Rule 2C of the valuation rules, any goods meant for human consumption classifiable under Chapter 1 to 22 of Central Excise Tariff Act, 1985 are not ‘inputs’ for provision of such service. Cenvat Credit is, therefore, not available on these item. Availability of Cenvat Credit on other inputs, input services and capital goods would be subject to the provisions of the Cenvat Credit Rules, 2004 including the provisions relating to reversal of credits contained in Rule 6. It may be noted the sale of food in the restaurant would amount to clearance of exempt goods and thus the provisions of Rule 6 of the CENVAT Credit Rules, 2004 will not applicable.