Hotels to be Assessed for Additional Income collected as Service Charges: CBDT [Read Circular]

The Central Board of Direct Taxes (CBDT) has mandated that the hotels / restaurants will be taxed for the additional income collected as service charges under the Income Tax Act, 1961.

Last year, the Ministry of Consumer Affairs, had issued a Guideline on Fair Trade Practices related to charging of service charge from consumers by hotels/restaurants. These Guidelines were given to address the issue of unfair and restrictive trade practices adopted by some hotels/restaurants by way of charging tips/gratuities from customers without their express consent in the name of service charge. In effect, payment of service charge by the customer to a hotel/restaurant was declared to be completely optional vide the aforesaid Guideline.

In this background, it was noticed that some hotels/restaurants are still pre-emptively deciding upon the service charge without allowing the customers to voluntary decide whether they actually want to pay the service charge or not. Futher, 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.

The Board, therefore, clarified that “Thus, while framing assessments or carrying out verification under various provisions of the Income-tax Act, 1961 in the case of hotels/restaurants, it is necessary to examine whether there is any under-reporting or non-reporting of additional income collected in the name of service charge. Further, the disclosure and disbursement details of service charge transactions as contained in the P&L A/c, I/E statement & Balance-sheet should be critically examined to ascertain whether the receipts from service charges 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 by the hotel/restaurant or there is some under-reporting or non- reporting, the receipts should be duly brought to tax in the hands of concerned hotel/restaurant.”