Expenditure Tax
Expenditure Tax was a tax the Indian government levied on hotel and restaurant bills under the Expenditure-tax Act, 1987. It applied to restaurant charges until 31 May 1992 and to hotel room charges of Rs.3,000 or more per day until 31 May 2003, after which it stopped being charged.
The Expenditure Tax Act, 1987
The Expenditure Tax Act of 1987 is an act that governs all taxation-related processes associated with the chargeable expenditure that an individual incurs in certain hotels or restaurants.
The Expenditure Tax Act, 1987 came into force on 1 November 1987, through a notification issued by the Central Government in the Official Gazette.
This act will charge to tax "chargeable expenditure" provided these two criteria are fulfilled:
- The charges are incurred in a hotel where the room rent is Rs.3,000 (per day), or more.
- The charges are incurred in a restaurant.
- This applied only to a restaurant that was not part of a hotel already covered by the Act and that had air-conditioning facilities; restaurants without air-conditioning were not covered.
It should be noted that in the case of room rent charges in hotels, the Assessing Officer of the Income Tax Department has the power and freedom to deem whether the breakup of charges has been mentioned in the correct manner.
Other respective charges such as those for food, drinks, and other services cannot be used to cover up the actual charge of the room rental, etc. If there are discrepancies in this regard, the Assessing Officer will decide on what amounts need to be charged under the various headings in the itemized breakup of the bill.
Meanings of Chargeable Expenditure
Under the Expenditure Tax Act, 1987:
"Chargeable expenditure" refers to and includes any payment made to (or expenditure incurred in) the hotel which is connected to the provision of:
- Accommodation (residential, or otherwise).
- Accommodation in the hotel on hire or lease.
"Chargeable expenditure" does not include:
- Payments made (expenditures incurred) in foreign exchange (before the 1st of October, 1992).
- Payments made (expenditures incurred) by anyone within the purview of the Vienna Convention on Diplomatic Relations, 1961 or the Vienna Convention on Consular Relations, 1963.
- Payments made (expenditures incurred) in any shop / office which is not owned or managed by the person who carries on the business of a hotel.
- Expenditures incurred by way of taxation under any act, including this one.
- Any expenditure incurred (payments made) in Indian currency that was acquired on the conversion of foreign exchange into Indian currency will in such cases and circumstances as may be prescribed, be treated as though it were incurred in foreign exchange, and will not count as chargeable expenditure.
Values of Taxation under the Expenditure Tax Act, 1987
Under the Expenditure Tax Act, 1987, tax was charged as:
- 10% of the charges incurred (payments made) at a hotel.
- 15% of the charges incurred (payments made) at a restaurant.
This tax applied to hotel charges from 1 November 1987 until 31 May 2003, and to restaurant charges from 1 October 1991 until 31 May 1992. It has not been charged on any hotel or restaurant expenditure since these dates.
Collection of Expenditure Tax
- Expenditure Tax is collected from the person running the business (hotel and/or restaurant) as the case may be, when he or she provides the services that result in "chargeable expenditure".
- Expenditure Tax is collected at the rate of 15% from restaurants when it renders services deemed taxable.
Summary
Expenditure Tax was levied under the Expenditure-tax Act, 1987 on chargeable expenditure at specified hotels and air-conditioned restaurants. Restaurant charges stopped being taxed after 31 May 1992 and hotel charges after 31 May 2003, so the tax is no longer collected today.
FAQs on Expenditure Tax
1.What is Expenditure Tax in India?
Expenditure Tax was a tax the Indian government levied on chargeable expenditure at certain hotels and restaurants under the Expenditure-tax Act, 1987. It applied only to hotels and restaurants that met specific criteria, not to every establishment. The tax is no longer charged today.
2.What is the Expenditure-tax Act, 1987?
The Expenditure-tax Act, 1987 is the law that set out how chargeable expenditure at qualifying hotels and restaurants in India was taxed. It defined the criteria, rates and exclusions for Expenditure Tax. The Act remains on the statute book even though its taxing provisions are no longer active.
3.Is Expenditure Tax still applicable today?
No, Expenditure Tax is no longer levied on hotel or restaurant bills. It stopped applying once the applicable period set out in the Expenditure-tax Act, 1987 came to an end. The exact dates are detailed in the Values of Taxation section above.
4.Which hotels were covered under the Expenditure-tax Act, 1987?
The Act covered hotels whose room rent for a unit of accommodation was at or above a set daily threshold, detailed under The Expenditure Tax Act, 1987 section above. This threshold was assessed at the time the expenditure was incurred. Hotels below this rent level fell outside the Act.
5.Were all restaurants covered under the Expenditure-tax Act, 1987?
No, only restaurants that were not part of an already-covered hotel and that had air-conditioning facilities were covered under the Act. Restaurants without air-conditioning were not liable for Expenditure Tax. This distinction is explained under The Expenditure Tax Act, 1987 section above.
6.What does "chargeable expenditure" mean under the Expenditure-tax Act, 1987?
Chargeable expenditure means any payment made to, or expenditure incurred at, a covered hotel for accommodation, whether residential or otherwise, including accommodation taken on hire or lease. The full definition is set out under Meanings of Chargeable Expenditure above.
7.What expenses were excluded from chargeable expenditure?
Exclusions included certain payments made in foreign exchange, expenditure by persons covered under the Vienna Conventions on diplomatic and consular relations, payments at shops or offices not owned or managed by the hotel, and any tax paid under any law. The complete list appears under Meanings of Chargeable Expenditure above.
8.Who decided how a hotel bill was split between room rent and other charges?
The Assessing Officer of the Income Tax Department had the authority to determine whether a hotel's itemised bill correctly reflected the room rent. This prevented hotels from disguising room rent as charges for food, drinks or other services. More detail is available under The Expenditure Tax Act, 1987 section above.
9.Who was responsible for collecting Expenditure Tax?
The person running the hotel or restaurant business was responsible for collecting Expenditure Tax whenever a service resulted in chargeable expenditure. This obligation applied only while the Act's taxing provisions were in force. Further detail is available under Collection of Expenditure Tax above.
10.What tax rates did the Expenditure-tax Act, 1987 apply to hotels and restaurants?
The Expenditure-tax Act, 1987 set out separate rates for hotels and restaurants, along with the periods during which each rate applied. These figures are detailed in the Values of Taxation section above.
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