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Hoteliers miffed over service-charge tax

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The Central Board of Direct Taxes (CBDT) made life more complicated for the hotel and restaurant operators last week. The apex direct taxes body issued a directive saying service charge collected but not distributed to employees or its under-reporting/ non-reporting will be taxed in the hands of such hotel and restaurant operators.

The CBDT has asked its revenue officers to critically examine the disclosure and disbursement details of service charge transactions in the profit and loss account, income and expenses statement and balance-sheet of hotel and restaurant operators. ‘It 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. 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, such receipts should be duly brought to tax in the hands of concerned hotel/ restaurant’, CBDT said in its directive.

Players in the hotel and restaurant industry are obviously miffed. If making payment of service charge by the customer “optional” wasn’t enough a trouble, another layer of confusion has got added with the new directive. All this despite proper disclosure of service charge related details in the books of accounts by all of the member hotels and restaurant operators of the respective associations.

Kamlesh Barot, past president of Federation of Hotel and Restaurant Associations of India (FHRAI) and director of Vie Hospitality, said, “Our stance is everything else is procedural, but how can there be double taxation on service charge, once on the establishment proposed to be brought in now, when it is already taxed as income at the hands of the employees, on whose behalf we collect and disburse the service charge! Secondly, it is not an income at all for the establishment on which an income tax can be levied. That’s because the establishment collects the service charge on behalf of the employees, which all our members redistribute it to the staff. As long as our non-members who don’t distribute the collected service charge to employees are taxed, we don’t have a problem with that.”

The tax complaint restaurateurs have a very strong view on the service charge issue and its treatment in their books of accounts. Rajeev Matta, chief executive officer, Sanjeev Kapoor Restaurants (SKR) P Ltd, said, “We understand that the service charge is optional. We understand that if any customer is not comfortable paying the rate, he/she can opt out. At our company managed outlets, we inform the guests and collect service charge and the entire amount is shown in collections of the restaurant as revenue. Then the applicable government tax is paid on it and the entire amount is paid to the staff as per their eligibility along with their salaries in cheque or in their accounts.”

The industry, thus, is unanimous on the fact that the directive should be implemented aggressively on the non-compliant hotel restaurant operators. The CBDT circular, according to Rahul Singh, president, National Restaurant Association of India (NRAI), strengthens the position of the legit restaurateurs. “This initiative will prevent misuse by exposing the unscrupulous operators,” said Singh.

Food and beverages (F&B) industry experts said that most hoteliers and restaurateurs actually do distribute service charge to their teams but it isn’t always 100%. Some percentage (25-30%) of the service charge may be deducted for breakage and theft for which the staff is deemed responsible and some percentage (5-10%) may be deduced towards staff welfare.

Ravi Wazir, a food and restaurant industry consultant, said, “This is considered a fair and honest practice between employers and employees since the beginning of the practice of levying a service charge. The percentage that remains is then distributed by the management amongst front-of-the-house and back-of-the-house teams in pre-agreed proportions to individual team members, one or more times each month.”

It’s a sole discretion of the owner of the restaurant or hotel to pass information on levying of service charges, said Rohit Malhotra, business head – India Operations, Barcelos India. “Since it’s a CBDT directive and comes under the Income Tax Act, it’s a legal transaction and appropriately reflected in the balance sheet. Having said that, for its complete and proper implementation, we also need proper support from the government on this,” said Malhotra.

Echoing the sentiments, Hemang Bhatt, co-founder and managing director, HAS Lifestyle Ltd and partner at restaurant chain B Bhagat Tarachand, feels if hotels and restaurants want to levy the service charge, they should consider the option of including it in the menu prices itself instead of charging it separately.

Industry experts are of the view that there could be some hotel/ restaurant operators who may not be going by the books and it’s definitely a bad news for such players. According to Amit Maheshwari, managing partner and international tax lead, Ashok Maheshwary & Associates, the tax department have the apprehension that some of the hotels/restaurants are not completely following the rules.

“To tackle cases where there is no actual reimbursement or the service charges itself has been under-reported, instructions have been issued by CBDT to officers to exercise greater scrutiny for this. However, one has to see if this would result in any significant revenue to the tax department since even without the directive, non-payment of tips to staff in-spite of collecting them would definitely increase profit and consequently the taxes. One can expect greater scrutiny of restaurant operators going forward,” said Maheshwari.

The hotel/ restaurant industry players are of the view that the CBDT should take some time in understanding the multi-dimensional aspects of this issue and the consequences of such a decision on all citizens including – the entrepreneurs, their teams and their customers. “Those establishments found to be cheating their teams or their customers for their own gains, must certainly be penalised,” said Wazir.

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