The Difference Between Service Charge & Service Tax

Difference between Service Charge and Service Tax:

Service Charges are typically levied for the services rendered by the vendor. It is similar to a tip given to a waiter, except that it goes directly to the restaurant which then may or may not share the amount with its staff. This charge is not levied by the government and directly goes into the pocket of the restaurant owner. Generally, the charges are between 5- 10 % solely at the discretion of the management or the owner and there are no guidelines provided by the Income Tax (IT) Authorities. Also, remember that there should be no Service Charges if it is a takeaway.

Service Tax is a government tax that is levied at 12.36 % on 40 % value of your total bill i.e. effectively, it would be 4.94 % on your total bill value (In 2015 union budget, the Service Tax has been raised to 14 %). If you notice that the Service Tax is exceeding 5 % of your total bill, you can always refuse to pay the extra amount and this Service Tax is same across all the States in India. Also, only air-conditioned establishments can charge you Service Tax. Many establishments charge 12.36 % on your total bill rather than 40 %. Be sure to check the same and only pay the mandated tax.

Is it legal to levy Service Charge by the restaurants?

It is legal to levy service charge by the restaurants but it is not compulsory for the customers to pay the service charge if they do not like the service.   

What can customer do if he is charged a Service Charge and does not want to pay the charge?

Service Charges billed by the restaurants are optional and it is up to the customers to pay it or not. If he is billed the Service Charge he can ask to deduct the amount charged as a Service Charge from the bill.


This information has been obtained from the website of The Union Ministry of Consumer Affairs. The notification can be viewed here.