The Central Board of Direct Taxes (CBDT) said that if hotels and restaurants collect service charges but do not pass on the amount to the staff or workers, such amount collected will be liable for income tax.
The ministry has directed field offices to examine the statements and balance sheets of the hotels and restaurants and check if service charges are being collected, or if additional amounts collected in the name of service charges are under-reported or not reported at all. If a hotel or restaurant is found conducting any of the aforementioned practices, the service charges will be brought to tax.
The direction to check the books of the hotel and restaurants came as a response to the information provided by the Ministry of Consumer Affairs about the many consumer complaints coming in regarding service charges.
As per a guideline presented in April 2017, the Ministry of Consumer Affairs had said that the payment of service charges at hotels and restaurants is completely optional. The guideline further stated that the bill provided by the hotel or the restaurant may have an empty column where the customer could mention how much he/she wishes to pay as the service charge.
However, several hotels and restaurants, post the revision of the guideline, did not provide a choice with respect to the service charge. The Consumer Affairs ministry, hence, brought the issue to the notice of the CBDT. The CBDT, in turn, decided to examine the receipts of hotels and restaurants and take the necessary measures.
The CBDT believes that there is a possibility that certain hotels and restaurants collect service charges and do not pass it on to the staff. Instead, the owner keeps the amount to himself/herself. In such cases, the amount collected will be considered revenue.
Source: Money Control