Gorkhapatra journalist Prakriti Adhikari and his friends had gone out to lunch at Chicken Station in Maitighar last week.

At the end of a hearty meal, they asked for the bill, and were surprised to see that the restaurant had added value-added tax (VAT). An argument followed, but they ended up paying the inflated bill.

“We told the manager that VAT could not be added to the bill as per the court ruling. But they were adamant on charging VAT,” said Adhikari.

The government's consumer rights and quality watchdog says it’s illegal to add VAT to the menu price.

According to the Department of Commerce, Supplies and Consumer Protection, it has taken action against three restaurants for overcharging diners after the Kathmandu District Court issued a landmark ruling last August outlawing VAT in restaurant bills.

As the public is still not aware that VAT cannot be charged in restaurants, few file complaints. The department said that aggrieved diners could send such bills to the office through any means.

“We will take action if we catch restaurants and hotels charging more than the menu price,” said Mahesh Bhattarai, director general of the Department of Commerce, Supplies and Consumer Protection.

“We will warn the restaurant if it is its first offence,” said Bhattarai. "If we receive a second complaint, the restaurant will be penalised. The law is clear on this.”

The department said that restaurants and hotels overcharging customers will face fines from Rs200,000 to Rs300,000 under the Consumer Protection Act 2018.

Exactly a year ago, journalist Madan Dhungana had filed a case against Green Valley Getaway, a resort at Budhanilkantha, for adding service charge and VAT to the menu price.

On August 21, the Kathmandu District Court ruled against the resort and ordered it to pay Dhungana Rs10,000 in compensation.

“After the court verdict, we wrote to all District Administrative Offices outside Kathmandu Valley about the double taxation matter,” Bhattarai said.

Hotels and restaurants were given time to amend their menus so that 13 percent VAT and 10 percent service charge are included in the meal prices shown on the menu. They cannot issue bills with extra taxes, officials said.

Araniko Rajbhandari, president of the Restaurant and Bar Association Nepal, said that most of their members have changed their menu prices by including VAT and service charge. “If any restaurant does not follow the government rule, that is illegal,” he said.

"Customers can complain if they have been overcharged by calling the phone number of the department office or by visiting the official website which has a separate section for registering complaints," said Bhattarai.

According to the department, it has taken action against three restaurants for charging more than the menu price by fining them Rs200,000 each.

“When we receive a complaint, we warn the restaurant or hotel to review its menu price and give it a deadline of three to five days,” Bhattarai said. "If they do not change their menu after that, the department will take action."

Bhattarai said that taking action against first-time offenders can create chaos in the business, and that the department had no intention of imposing fines just to increase revenue collection.

“We have found that after the first warning, the restaurants and hotels have changed their menus,” he said.

Hotels and restaurants have been levying a service charge on food and beverage bills since 2007. The mandatory service charge system came into force on January 1, 2007.

Since then, hotel and restaurant customers have been paying 24.3 percent more than the menu price—10 percent compulsory service charge, 13 percent VAT and 1.3 percent service tax. The VAT and service tax go to the government.

Consumer rights activists say that tax on alcohol and packaged goods is prepaid. According to Bishnu Prasad Timilsina, general secretary of the Forum for Consumers' Rights, most of the imported products are priced after including VAT.

"But when restaurants and hotels issue their bills, they add VAT again, which is double taxation. The restaurants get a VAT refund and that goes into their pocket. It doesn't go to the government,” he said.

The service charge was made mandatory in 2007 in a bid to narrow the differences between hotel management and employees when their dispute reached a peak.

As per an agreement signed in 2007, employees get 68 percent and management gets 32 percent of the amount collected as service charge.

In June 2018, Hotel Association Nepal and the Nepal Tourism and Hotel Labourers Association ended a two-year row over sharing the service charge paid by consumers.

They agreed that hotel employees would get 72 percent, the hotel management would get 23 percent, Hotel Association Nepal would get 2 percent and the three trade unions affiliated to the Nepali Congress, CPN-UML and CPN (Maoist Centre) respectively would get 1 percent each.

Restaurant and Bar Association Nepal announced in January 2019 that the 10 percent service charge added to the meal bill had been made optional, drawing smiles from customers and frowns from restaurant workers. But only a few restaurants are following the decision.