In a major relief to consumers as well as the staff working at hotels and restaurants, the central board of direct taxes (CBDT) has said service charge collected by hotels and restaurants but not passed on to staff and workers will be liable to income tax in the hands of such entities.

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The CBDT has issued a fresh guideline note to all principal chief-commissioners of Income-tax informing them regarding the change of treatment of service charge.

In a guideline issued on November 19, CBDT said, “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. Thus, this income, which is not passed on to the staff, is subject to income tax."

The missive from the CBDT came after the ministry of consumer affairs flagged that some hotels and restaurants are collecting service charge from customers in a compulsory manner, which is in contravention with the guidelines issued by the ministry.

The CBDT said that the consumer affairs ministry has brought to its notice that some hotels/restaurants are still pre-emptively deciding upon the service charge without allowing the customers to voluntarily decide whether they actually want to pay it or not.

In April last year, consumer affairs ministry had issued a guideline on fair trade practices saying payment of service charge by a customer to hotel or restaurant is completely optional.

The guidelines said that the bill presented to the customer may clearly display that service charge is voluntary and the service charge column of the bill may be left blank for the customers to fill up before making payment.

The tax department has categorically mentioned that the treatment of service charge taken from customers by the hotels/restaurants under the Income-tax Act should be changed. CBDT has urged revenue officers to examine under/over reporting of additional income collected as service charge.

"To tackle cases where there is no actual reimbursement or the service charges itself has been underreported, instructions has been issued by CBDT to field officers to exercise greater scrutiny," said Amit Maheshwari, partner, Ashok Maheshwary & Associates. "However, one has to see if this would result in any tangible benefits to the tax department, since even currently non-payment of tips to staff in-spite of collecting them would definitely increase profit and consequently the taxes. One can probably expect heightened scrutiny of restaurant operators going forward."

"These guidelines are going to increase the strain of the mischievous hotels/ restaurant owners as it points out their misdeeds," Suraj Nangia, partner, Nangia Advisors LLP.

Such taxpayers would now have to act prudently by either eliminating such levy on the total bill amount or passing on its effect to the hotel/restaurant's workers, he added.

First Published:Nov 22, 2018 9:48 PM IST