Are Delhiites paying too much tax at restaurants? Delhi High Court will find out

The Delhi High Court today issued notice in a writ petition contending that restaurants in the capital are charging tax in excess of what is prescribed under the law..Filed by Anish Agarwal and Avi Tandon – graduates of National Law University, Jodhpur – the petition alleges that Delhi restaurants are charging Value Added Tax (VAT) on the service component of invoices..The claim highlights a lacuna in the law related to taxation of the goods component of bills generated in restaurants. As is widely known, VAT is charged by states, while service tax is charged by the Centre..The Service Tax (Determination of Value) Rules, 2006 clearly lays down that service tax must be charged solely on the service component of bills. Rule 2C determines the service component of the bill at 40% in places where.“goods, being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied…”.The Finance Act caps service tax at 15% of the bills. Essentially, a total of 6% service tax can be charged on the entire amount of the bill (40% of 15%)..However, no such guidelines exist for the goods component in bills. In effect, restaurants in Delhi are charging VAT (20% for alcohol and aerated drinks and 12.5% for other food and beverages) on the entire amount of the bill..In order to clarify things, the petitioners had written a letter to the Commissioner of Value Added Tax, Department of Trade & Taxes, Government of NCT of Delhi requesting him to intervene. They are yet to receive a reply..The petitioners have also filed another similar writ in the Allahabad High Court, with the High Court also issuing notice in the matter..The petitioners have stated that such a practice is ultra vires Article 265 of the Constitution of India. It also relies on some Supreme Court decisions including the 2006 judgment of BSNL v. Union of India. In BSNL it was held that that after the Forty-sixth Amendment to the Constitution of India, the sale element of those contracts which are covered by the six sub-clauses of clause (29-A) of Article 366 of Constitution of India are separable..“No one denies the legislative competence of the States to levy sales tax on sales…this does not however allow the State to entrench upon the Union List and tax services by including the cost of such service in the value of the goods.”.Further, in Imagic Creative (P) Ltd. v. Commissioner of Commercial Taxes and Ors, it was held,.“Payments of service tax as also VAT are mutually exclusive…It is, therefore, difficult to hold that in a case of this nature, sales tax would be payable on the value of the entire contract, irrespective of the element of service provided.”.Among the reliefs sought by the petitioners is a direction to the authorities to take appropriate action against restaurants indulging in this practice. It is also prayed that the NCT government issue a circular stating that VAT can only be charged on the goods component of invoices generated by restaurants..A bench of Chief Justice G Rohini and Sangita Dhingra Sehgal J issued notice today. The petitioners are represented by advocate Satyam Thareja, while Sanjeev Narula appeared for the NCT government..Read the petition: