Contributed by: Sanjay Mathur
Regulations for setting up a restaurant in India
Ownership Structure
Ownership structure can be in form of a sole proprietorship for which there is no specific law. Partnerships can be registered under the Indian Partnership Act. Alternatively, a company can be formed under the Companies Act. Selection of a particular form of ownership depends on several factors some of which can be financing, management structure, size of business, taxes etc. Income tax compliance of individual owners in form of submission of returns and PAN, where-ever applicable must be done for smoothly proceeding towards starting a restaurant. Foreign owners, whether companies or individuals, are permitted to carry on restaurant business in India.
Location
Location of a restaurant, the key to its success, should be selected based on high visibility for the targeted customers, easy access and preferably be in a popular commercial area where a large number of people throng.
Many municipal areas follow zoning whereby restaurants are located in designated areas and not permitted in other areas. Municipal license under the Municipal Laws has to be obtained. Location of restaurants close to the sea is governed by the Coastal Regulation Zone Rules which have to be complied with. As restaurants involve seating of groups of people, fire safety norms have to be adhered to and clearance from the fire department has to be obtained. Playing of music, either in recorded form or live performance, is a prerequisite to give customers a leisurely food experience. Clearance from the local police is required to the effect that public nuisance in the neighborhood of the restaurant would not be caused by playing of the music.
Taxes
Taxes are based either on the whole of the income of the restaurant or each bill raised, the former in the purview of the Union Government in form of income tax, whereas the latter is in the purview of the state government in form of VAT. Some state governments may levy additional tax like the State Development Tax. VAT/SDT is recoverable from customers.
Compliance for VAT requires registration with the State VAT department and payment of VAT on a periodic basis followed by annual assessments.
Supreme Court of India has held that service tax is not applicable to restaurants.
- Sanjay Mathur
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@Sanjay: Thank you for a really informative write-up. I have a query here. You mentioned that Supreme Court of India has held that service tax is not applicable to restaurants. Does it mean they should not be charging it? Could you please elaborate on this. Thanks.
Well, this Supreme Court ruling has NOT stood the test of time! Since the above article was written the law has been changed by an Act of the PArliament. So, NOW, service tax ought to be charged by AC restaurants! The Central Government is plugging loopholes!
@Amit: I think you’re mistaking service ‘charge’ for service ‘tax’.
@Sid: Right, I stand corrected. Thanks.
It want to know that restaurants like dominos are leiving vat, as i was charge Rs.18 as vat tax for pizza of Rs.55 is it correct , also plz tel me clearly that food restaurant are applicable for any tax which is chargeable directly to customer.
18/55=32.72%. This seems to be a high VAT rate. Please check the bill carefully.
Your second question is not clear to me. All VAT is directly billed to the customer – Is’nt it?
I have same query like HIMANSHU any body who would like to throw some comments whether VAT can be applied or service charge or not..
VAT is on goods sold, that is, on the Food sold at the restaurants. VAT goes to the State Government. Service tax is on the bill value for the “service portion” of deal you get at your restaurant. Service tax goes to the Central Government. Service Charge is a levy by restaurants for the service they provide where the money goes to the restaurant’s till. As a business practice, you will notice, restaurants have been charging service charges after Service tax on restaurants became applicable. As of now, there is no service tax on service charge, though conceptually there should be. Expect realignment in the rules in Budget 2012.
Hi,
I have been to different restaurents in Bangalore where 3 type of bills are available,
1. Service tax and VAT
2. Service tax and no VAT
3. No service tax and no VAT (bill price will be as per the menu)
Could anyone answer why there is a variations in the bill amount in different restaurents and what should be the correct taxes we need to pay?
My question is the same as Kapil’s. Please respond. Will be much obliged.
Service tax and VAT:
This is the position as it should be.
Service tax and no VAT:
VAT exemptions may be playing their role to your benefit. More details required to correctly answer this question, like, what type of restaurant, AC or not, BAR or not, how upmarket the restaurant is, etc.
No service tax No VAT (Bill price as per Menu):
Menu price has been grossed up to account for VAT/Service tax. This will be clear, if you compare the Bill(showing all details) with the Menu.
This practice is followed to keep the customer in good humor so he does not get surprising add ons in the bills! Venkys restaurants follow this practice