Restaurants and hotels imposing service charge on customers in the name of tips but not passing them full to their employees could court trouble from taxmen. Central Board of Direct Taxes, the apex direct taxes body, has directed its field officials to examine balance sheet and expenditure statement of restaurants and hotels in cases where there is any under-reporting or non-reporting of additional income collected in the name of service charge. 

The CBDT has said wherever it is found that the service charge receipts have not been passed on to the staff or there is some under-reporting or non-reporting of receipts, it should be duly brought to tax. 

“While framing assessments or carrying out verification under provisions of the Income Tax Act, 1961, in case of hotels and 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,” it said in a circular. 

Service charge is supposed to be in the nature of ‘tips’ for hotel or restaurant staff and is sought to be collected on their behalf. But there have been reports of some restaurants and hotels not passing it to their staff. Service charge is not taxable and the amount of service charge levied is entirely at the discretion of restaurants and hotels. Usually, the rate is 10% and it is mentioned on the menu. 

This follows a clarification by the department of consumer affairs in April 2017 that service charge levied by restaurants and hotels is ‘voluntary’ and customers can refuse or pay according to their wish. 

Subsequently, minister of consumer affairs, food and public distribution Ram Vilas Paswan had tweeted on September 12, 2017: “in view of the seriousness of issue, department of consumer affairs has written to CBDT to consider inclusion of service charge while assessing tax”. #casansaar (Source - Economic Times)