Under-reporting and non-reporting of additional income in the name of service charge, or not transferring receipts under this category to staff, will lead to the levy of income tax on restaurants and hotels, the Central Board of Direct Taxes (CBDT) has said. The CBDT has directed its field officials to “critically examine” the balance sheets and account statements of restaurants and hotels to ascertain whether the receipts from service charges are fully disclosed as part of their turnover or not while framing assessments or carrying out verifications under various provisions of the Income-Tax Act.
“The disclosure and disbursement details of service charge transactions as contained in P&L (Profit & Loss) A/c, I/E (Income/Expenditure) statement and balance sheet should be critically examined to ascertain whether receipts from service charges are fully disclosed as part of the turnover of the hotel/restaurant or not,” the CBDT said in a communication.
The missive comes after the Ministry of Consumer Affairs flagged that some hotels and restaurants are pre-emptively deciding service charge without allowing customers to voluntary decide whether they actually want to pay the service charge or not. Also, the CBDT said there is “every likelihood that such amount collected as service charge from the customers in a compulsory manner does not actually reach the workers and is instead kept by the hotel/restaurant owners”.
In April last year, the Ministry of Consumer Affairs had issued a guideline on fair trade practices, saying payment of service charge by customer to hotels or restaurants is completely optional. The guidelines said that the bill presented to the customer may clearly display that service charge is voluntary and the service charge column of the bill may be left blank for the customers to fill up before making payment.
The CBDT said that “while framing assessments or carrying out verification under various provisions of the Income-tax Act, 1961 in the case of hotels/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”.
Tax experts said this will curb tax evasion but also increase the strain for hotels and restaurants. Nangia Advisors LLP Partner Suraj Nangia said, “These guidelines are going to increase the strain of the mischievous hotels and restaurant owners as it points out their misdeeds. Such taxpayers would now have to act prudently by either eliminating such levy on the total bill amount or passing on its effect to the hotel or restaurant’s workers.”