A STUDY ON IMPACT OF VAT ON CONSUMABLE GOODS WITH SPECIAL REFERENCE TO RESTAURANTS

SubmittedIn partial fulfillment for the award of the degree ofBACHELOR OF COMMERCE (HONOURS)

ByK.AMRIN TAJ

REG NO.: 12H0004

Under the guidance ofMs. HEMALATHA, M.Com, M.Phil, MBAAssistant Professor Department of Commerce

SHRIMATHI DEVKUNVAR NANALAL BHATT VAISHNAV COLLEGE FOR WOMENAccredited with ‘A’ grade by NAAC

Chromepet, Chennai-6000442012-2015

INTRODUCTIONA tax may be defined as a "pecuniary burden laid upon individuals or property owners to support the government, a payment exacted by legislative authority”.

Taxation in India

DIRECT TAXES

Income tax Wealth tax Securities

transaction taxCapital gain tax

INDIRECT TAXES

Excise duty

Customs duty

Service tax

Central sales tax

Value added tax

1. VALUE ADDED TAX (VAT):

Value added tax is levied on sale of any item. As food is being sold in a restaurant, VAT is liable to be paid on such sale.

VAT is levied by the state government.

VAT rates on food and beverages usually range from 5% to 20%

varying from state to state.

2. SERVICE CHARGE: This is a charge levied by the Restaurant owners as payment for

the services rendered like serving food etc.

This charge is optional on the part of the restaurant and they are free to charge any amount as service charge after making proper disclosures in the Menu card.

3. SERVICE TAX: Service tax is the tax levied by the Government on the

services rendered by the restaurants.

The charge for the Food served in Restaurants is a composite charge for the food as well as for the services. As it is a composite charge, Service tax cannot be levied on the whole amount. Bifurcation of the Total bill into 2 parts i.e. Value of Goods sold and Value of services provided is very difficult.

Therefore, in case of any composite charge, the Government usually announces an abatement scheme wherein taxes are not levied on the total amount but only on a certain portion of the total amount. So, service tax should be on the 40% of the bill.

 

For purpose of simplification, VAT has been presumed at 14.50% on the total food bill.

Total Food bill Rs. 1, 000

Service charges Rs. 100

Total Rs. 1, 100

VAT @ 14.50% Rs. 159.50

Total Amount before Service tax Rs. 1, 259.50

Service Tax rate 12.36%

Proportion on which service tax is 40%

to be charged

Net Effective rate of Service Tax 4.94%

Amount on which service tax is Rs. 1, 100

to be paid (Rs. 1000 + Rs. 100)

Total Amt of Service tax to be paid Rs. 54.34

(4.94% of Rs.1100)

Total Amount Payable by Customer Rs. 1, 313.84

EXAMPLE OF TAX COMPUTATION

VAT and other charges imposed by restaurants in the food bill are quite

high.

Hiding behind loopholes in the food taxation system and taking advantage

of the ignorance of customers, restaurateurs are conveniently swiping

more money from your wallet.

The methods used are varied.

They range from bloating the basic bill amount by adding service

charge and then levying taxes on it, to intertwining national and

state tax codes to result in a heavier bill.

STATEMENT OF THE PROBLEM

The size of sample was small in relation to Chennai

zone.

The duration for the study is very less, so the

results may not be applicable for a long period of

time.

Data could not be collected from the restaurants

on their VAT generation and policies attached to it.

LIMITATION OF THE STUDY

Output VAT

Input VAT

Zero rated

Exempt

Input

Capital goodsVAT

Ter

min

olog

yTHEORETICAL BACKGROUND

History• Implementation on April 1, 2003.

1. Introduction of uniform floor rates of sales tax.

2. Discontinuation of sales-tax based incentive schemes, and

3. Introduction of VAT on the basis of progress relating to (1) and (2) above

 

GovernmentEasy to administer

& transparent

Mass participation of tax payers

BENEFITS TO THE STAKEHOLDERS

ANALYSIS & INTERPRETATIONTABLE 1: TYPE OF RESTAURANTS

TYPES NO.OF

RESPONDENT

S

PERCENTAGE

AIR-

CONDITIONE

D

32 64 %

NON- AIR

CONDITIONE

D

18 36 %

TOTAL 50 100%

Air-Conditioned Non-Air conditioned0%

10%20%30%40%50%60%70%

64%36%

TYPE OF RESTAURANTS THEY VISIT

INFERENCE: From the table it is clear that majority of the respondents visit air-

conditioned restaurants.

TABLE 2: MODES OF PAYMENT

MODES OF

PAYMENT

NO. OF

RESPONDENT

S

PERCENTAGE

CREDIT CARD 3 6 %

DEBIT CARD 5 10 %

CASH 42 84 %

PAY PAL - -

OTHERS - -

TOTAL 50 100%

6%

10%

84%

MODE OF BILL PAYMENT

Credit cardDebit cardCashPaypalOther

INFERENCE: From the table it is clear that, majority of respondents make cash

payment of their food bill. It is also understood that working respondents prefer debit and credit card payment options. 

TABLE 3: IS BREAKAGE OF TAX CHARGES SHOWN IN THE BILL?

RESPONSES NO. OF

RESPONDENT

S

PERCENTAGE

YES 36 72 %

NO 14 28 %

TOTAL 50 100%

72%

28%

DO THE RESTAURANTS SHOW BREAKAGE OF

TAX CHARGES?YesNo

INFERENCE: From the table it is clear that the food bill shows the breakage of tax

charges so that the respondents are aware of the tax they are paying.

 

TABLE 4: KIND OF ITEMS OFTEN CONSUMED OUTSIDE

KIND OF ITEMS NO. OF

RESPONDENTS

PERCENTAG

E

PIZZAS &

SANDWICHES

15 30 %

MEALS & TIFFIN 17 34 %

FRESH JUICE & ICE

CREAM

11 22 %

CHATS &

SAVOURIES

7 14 %

TOTAL 50 100%

30%

34%

22%

14%

KIND OF ITEMS OFTEN CONSUMED OUTSIDE

Pizzas & SandwichesMeals & TiffinFresh Juice & Ice creamChat items

INFERENCE: From the table it is clear that, most of the respondents consume Meals & Tiffin outside in restaurants.

 

TABLE 5: ARE TAX RATES MORE ON FOOD DELIVERED AT HOME?

DO YOU FEEL THAT THE

TAX RATES ARE MORE

WHILE YOU GET FOOD

DELIVERED AT HOME?

NO. OF

RESPONDE

NTS

PERCEN

TAGE

YES 27 54 %

NO 23 46 %

TOTAL 50 100%Yes No

0%

10%

20%

30%

40%

50%

60%

54%44%

DO YOU FEEL THE TAX RATES ARE MORE WHILE THE FOOD IS

DELIVERED AT HOME?

INFERENCE: From the table it is understood that majority of respondents find the

tax rates to be more while the food is delivered at their home. 

FINDINGSThe respondents according to the sample often provide tips to waiters’ inspite of

paying service charges.

Some of the respondents from the sample visit food courts in shopping malls thrice or

more time. According to the data one of the respondent visits food courts on a daily

basis.

Some of the respondents from the sample compare the VAT rates among different

restaurants before they decide visiting any one.

Some of the respondents from the sample pay service tax inspite of packing their

food parcels.

Some of the respondents from the sample feel that VAT rates for online order differ

from those rates charged for the same item when ordered at restaurants.

SUGGESTIONSThe following are the important points a layman who eats at restaurant

should be aware of;Service tax is more in air- conditioned restaurants.

If your bill includes service charge you certainly need not pay tips to waiters

as the service charge is one that is supposed to be shared among staff of the

restaurant.

Service tax should be 40 % of the bill (i.e.) 4.94 %. But when it is exceeding 5 %

you can question it. Recently in UNION BUDGET 2015-16, it has been announced that

service tax has been increased from 12.36 % to 14 % (i.e.) 5.6 %.

When food is parceled service tax need not be paid as the customer is not

availing the facilities in the restaurants.

SUGGESTIONS

VAT on food items & drinks are different. So, the customer should ask for

separate bill for food & drinks.

When any packed food is charged more on MRP then VAT is not applicable

on that item. This is because in MRP’s of packed items VAT charge is already included.

VAT can be only charged on the bill amount for items prepared by the

restaurant itself. No VAT should be charged on items like packaged drinking water,

soft drinks and other packed food items. (E.g.) This is why pizza & sandwiches shop

usually charge high VAT compared to other restaurants as the items they make are

prepared by themselves.

SUGGESTIONS (CONTD…)

CONCLUSIONVAT is a major source of revenue for governments around the world and its

importance continues to increase. There is a risk of under-taxation and loss of

revenue, or distorting trade through double taxation. Value added tax is a major

source of revenue to the government. Yet, its burden on customers must not be too

high that eating in restaurants is a dream for the community who earn lower levels

of income. The mechanism and implementation of VAT rules should be made

efficient to ensure transparency to the general public. Most of the customers have

reservations in asking the restaurant managers on the discrepancies in their bill.

This is because customers who pay huge sum of food bill don’t mind for a meager

charge that is excessive. This attitude has to change in order to enhance efficiency

in VAT system in India.