Tax soup for restaurants not sharing service charges with staff
NEWDELHI: The income tax department has asked its officers to scan the accounts of restaurants to make sure that service charges collected by them are taxed as income, if it is not passed on to their employees.
The tax department on Monday instructed field officials to verify, as part of its regular tax assessment of hotels and restaurants, if there is any under-reporting, or total lack of disclosure of income collected as service charge. Officials were asked to closely examine the disclosure in financial statements about the amounts collected as service charge, as well as details of its disbursal to employees, a person familiar with the development said on condition of anonymity.
The tax authorities’ move to take a long, hard look at whether hotels and restaurants are enriching themselves with the service charge amount comes after the ministry of consumer affairs flagged its concern. The ministry informed the tax department that many restaurants arbitrarily decide on service charges rather than giving customers the option to tip the servers. The ministry also said that such amounts collected by the eatery are likely to be retained by them rather than distributing to the staff.
Mint has reviewed a copy of the instructions, which say that if it is found that the service charge amount collected from consumers are not passed on to the staff, it should be taxed in the hands of the restaurant or hotel.
Industry representatives said the move will encourage fair play. “The Central Board of Direct Taxes circular strengthens the position of legit restaurant operators who have been recognizing service charge receipts as part of their turnover and disburse it across the entire staff pool. This initiative will prevent misuse by exposing the unscrupulous,” said Rahul Singh, president, National Restaurant Association of India. In April, the consumer affairs ministry had clarified that an element of service is inherent in the supply of food by hotels and that charging anything beyond the price mentioned in the menu and applicable taxes without the customer’s consent was unfair trade practice. The ministry had then also asked restaurants to display that service charge is voluntary.