The Adhiti Tax Controversy

There was an interesting question raised by Pierre Fitter on the absence of tax details in the Adhiti Restaurant. The details on the taxation are as below:

There are two taxes involved here. One, is the Maharashtra VAT. The VAT registration is given in the bill but no details of tax. Second is the Service Tax. This is a complicated issue and requires a patient understanding. First the M-VAT. 

Taxes on food items is a state subject. Maharashtra has brought in a compounding scheme where originally (10%) on total turnover needed to be paid as Tax. That is why the M-VAT is not mentioned separately. 

As regards, Service Tax, I am not clear if Service Tax Registration number is mentioned. This Tax is controversial to say the least. Service Tax is only on Services and not on sale of items. But our FM, in his wisdom, has decided that when we go to restaurants we not only buy food but also avail certain services. He estimates that this would be around 40% of the price we pay. So the Service Tax on food items is 40% of Regular Service Tax of 12.36% which works out to 4.94% (and not 5% as popularly believed). Incidentally this Tax was originally on AC Restaurants that were serving Alcohol also. But this year the part mentioning Alcohol was deleted and all AC Restaurants came within Tax net.

Fortunately this is applicable only for AC Restaurants and not others. It is not clear if the AC restaurant of Adhiti is still operational.

Even if that was the case, it is not necessary that Adhiti would have to charge Service Tax separately. The bill in question was for Rs. 240. Adhiti owner would have to pay  Rs. 11.30 as Service Tax (4.94/104.94 x 240).

Under Service Tax Act the worst crime would be to collect Taxes and not pay. Not collecting taxes is not a crime. You just pay out of what you have collected.

But the punch is here:

on July 3rd, 2013 Kerala HC has said the Central Government has no authority to levy Service Tax on Food items.

The petitioners contended that Article 366 Section 29 (f) of the Constitution defined supply of food and drinks in hotels as ‘deemed sales’ and empowered the State governments to collect sales tax on the total value of sales. Therefore, the Centre has no authority or power to collect such service tax.

The court observed that the every purpose of incorporating the definition of tax on sale or purchase of goods in Article 366 was to empower the State government to impose tax on the supply, whether it was by way of or as part of any service of goods either being food or any other article for human consumption or any drink, intoxicating or not.

 

The Constitution permitted sale of goods during service as taxable. Necessarily, service formed part of sale of goods. Therefore, the State government alone has the legislative competence to enact a law imposing a tax on service elements forming part of sales of goods, the court ruled.

The court also ordered that if the petitioners had made any payments on the basis of the impugned clauses, they were entitled to seek refund of the amount.

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