Service charge taken from customers by hotels / restaurants to be taxed – CBDT Advisory

Service charge taken from customers by hotels / restaurants to be taxed and added to their income if not passed to staff or under-non reported.

CBDT advisory on treatment of service charge taken from customers by the hotels/ restaurants under the Income-tax Act.

In 2017, the Ministry of Consumer Affairs had issued a Guideline on Fair Trade Practices related to charging of service charge from consumers by hotels/restaurants. These Guidelines were given to address the issue of unfair and restrictive trade practices adopted by some hotels/restaurants  by way of charging tips/gratuities from customers wilthout their express consent in the name of service charge.

In effect, payment of service charge by a customer to a hotel/restaurant was declared to be completely optional vide the said Guideline.

Shri Ram Vilas Paswan, Union Minister for Consumer Affairs, Food & Public Distribution even told that in order to check the levying of Service Charge compulsorily, CBDT had been asked to consider inclusion of Service Charge while assessing tax.

As per latest office memo issued by CBDT to all Principal Chief Commissioners of Income Tax, it has been stated that in the context of said Guidelines , the Ministry of Consumer Affairs has brought to the notice of the CBDT (the Board) that some hotels/restaurants are still pre-emptively deciding upon the service charge without allowing the customers to voluntary decide whether they actually want to pay the service charge or not.

It has further been submitted by the Ministry of Consumer Affairs that 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 the said office letter, CBDT has emphasised 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.

CBDT has advised that the disclosure and disbursement details of service charge transactions as contained in the P&L A/c, Income & Expenditure statement & Balance-sheet should be critically examined to ascertain whether the receipts from service charges are fully disclosed as part of the turnover of the hotel/restaurant or not.

It has been stated that in situations, where it is found that the receipts have not been passed on to the staff/workers by the hotel/restaurant or there is some under-reporting or non- reporting, the receipts should be duly brought to  tax in the hands of concerned hotel/restaurant.

CBDT has advised sensitization of field formations on this issue.