Conduct surveys of all hotels, restaurants collecting service charge: CBDT

Noting the increase in the number of consumer complaints regarding the levy of service charge by hotels and restaurants, the Central Board of Direct Taxes (CBDT) told all Principal Chief Commissioners of Income Tax to conduct surveys of all hotels and restaurants which still continue to collect service charge.

The CBDT issued a fresh guideline note to the chief-commissioners on November 19 informing them regarding the change of treatment of service charge.

The guidelines read, “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 guidelines added, “If service charge has been levied, the receipts should be fully disclosed as part of the turnover of the hotel/restaurant... The disclosure and disbursement details of service charge transactions as contained in P&L (Profit & Loss) A/c, I/E (Income/Expenditure) statement and balance sheet should be critically examined to ascertain whether receipts from service charge are fully disclosed as part of the turnover of the hotel/restaurant or not... In situations where it is found that the receipts have not been passed on to the staff workers... or there is some under-reporting or non-reporting, the receipts should be duly brought to tax...”