India: Service Charge: Is It A Charge Or A Choice?

Last Updated: 27 April 2017
Article by Lucy Rana and Shakti Priyan Nair

In January, 2017, many newspapers and articles covered a story where they reported that the Ministry of Consumer Affairs, Food and Public Distribution has declared the service charges tacked onto the bill by restaurants and hotels to be a choice, and not mandatory. Just when every consumer started to breathe a sigh of relief, a large number of restaurants started to exercise their rights of admission, and put up a notice on the entry stating "WE CHARGE SERVICE TAX IN THIS ESTABLISHMENT", with the insinuation being if the customer did not want to pay service charge, they should go to another establishment. Now it becomes fairly obvious that since a large number of restaurants started to put these notices up, the customers would have no option left, but to pay the arbitrary service charge @5 to10% on their food bills.

However, a fresh wave of relief is about to wash over the customers again. On April 21, 2017, the Ministry of Consumer Affairs, Food and Public Distribution have released the "Guidelines on Fair Trade Practices Related to Charging of Service Charge from Consumers by Hotels/Restaurants" on their website, and the same can be accessed here. The Ministry of Consumer Affairs found that the restaurants and hotels did not disclose to the consumers that the Service Charge being added onto their bill where the taxes are mentioned, is not actually mandatory. Since the consumers were not aware of whether the service charge was mandatory or not, there were instances where the customer would tip in addition to paying the service charge under the impression that service charges are also a statutory charge like the Service Tax or VAT. The tip/consideration given by the consumer cannot be pre-emptively decided by the establishment itself, and the said decision as to how much tip/consideration should be paid is entirely dependent on the consumer. A brief overview of the guidelines is as follows:

  • A component of service is inherent in provision of food and beverages as ordered by the customer. Pricing of the product therefore is supposed to cover both the goods and service components.
  • Placing of an order by a customer amounts to his/her agreement to pay the prices displayed on the menu card alongwith applicable taxes. Charging for anything but the aforementioned, without express consent of the consumer, would amount to unfair trade practice under the Consumer Protection Act, 1986.
  • Tip or Gratuity paid by the customer is towards hospitality received by him/her, beyond the basic minimum service already contracted between him/her and the hotel management. It is a separate transaction between the customer and the staff of the hotel or restaurant, which is entered into, at the customer's discretion.
  • The point at which the customer decides to give a tip/gratuity is not when he/she enters the hotel/restaurant, and also not when he/she places an order. It is only after completing a meal that the customer is in a position to assess the quality of service, and decide whether or not to pay a tip/gratuity, and if so, how much. Therefore, if a hotel/restaurant considers that entry of a customer amounts to his/her implied consent to pay a fixed amount of service charge, it is not correct. Further, any restriction of entry based on this amounts to a trade practice which imposes an unjustified cost on the consumer, forcing him/her to pay service charge as a condition precedent to placing order of food and beverages, and as such it falls under restrictive trade practice as defined under Section 2(1)(nnn) of the Consumer Protection Act, 1986.
  • In view of the above, the bill presented to the customer may clearly display that service charge is voluntary, and the service charge column of the bill may be left blank for the customer to fill up before making payment.
  • The guidelines conclude by stating that a customer is entitled to exercise his/her rights as a consumer, to be heard and redressed under the provisions of the Consumer Protection Act, 1986, in case of unfair/restrictive trade practices, and can approach a Consumer Dispute Redressal Commission/Forum of appropriate jurisdiction.

Safe to say, the issuance of such guidelines has not gone over well with the restaurants and hotels, with the Federation of Hotels & Restaurant Associations of India (FHRAI) giving a statement that making service charges discretionary shall cause utter chaos in the industry. The FHRAI stated their regret over the Ministry of Consumer Affairs decision, and were reported to have said that though the rights of the consumers are paramount, the rights of individual establishments should not be impinged. Many restaurateurs and hoteliers have come forward saying that the service charges applied on the bill was their way of motivating the staff by providing an incentive to strive for. But often, I have put this question to myself, that whether this service charge collected from the consumers is indeed distributed among the staff members of restaurant? Further, whether it is a valid ground to overburden the customer by asking them to pay more than they are required to, without informing them that the service charge is at their discretion? Isn't it implied that wherever we pay a tip, it is for the purpose of incentivizing the staff? If the answer to all these questions is yes, then all other industries like salons, cinemas, flights, etc. can also levy service charge to their customer on the pretext of incentivising their staff.

It can be said with reasonable surety that this dispute is not yet over, and the FHRAI and other associations shall go forward demanding clarity and alternatives to service charges or approach the Hon'ble High Court under Writ Jurisdiction to stay the operation of these Guidelines. It shall be interesting to see whether the Ministry of Consumer Affairs decides to provide more detailed guidelines illustrating what the restaurants can or cannot do in terms of service charges, tips and gratuities, or whether the same guidelines remain in force. Therefore, as on April 23, 2017, customers are NOT required to pay service charge if they deem the restaurants services or hospitality to be unfit for a tip or gratuity.

We feel that since this practice of charging service charge has now been termed as an unfair trade practice, the Government or Ministry of Consumer Affairs should make sufficient provisions for the consumers to report such complaints with a separate grievance cell.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Lucy Rana
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