According to Union government approved guidelines in 2017, service charge on hotel and restaurant bills are voluntary and not mandatory.

To pay or not Decoding the ambiguity about service charge in restaurant billsRepresentational image from Picxy
Delve Business and Industry Tuesday, December 10, 2019 - 12:47

Nikhil John* (name changed) was not really happy with the service offered by the staff at a resto-pub in Bengaluru. He was particularly disappointed about the lackadaisical attitude of the waitstaff towards customers. When he received his bill, he noticed he had been charged a 10% service charge, in addition to the goods and service tax (GST).

Nikhil was aware that the service charge was made ‘discretionary’ since 2017. He enquired with the waiter, who informed him about the notice at the entrance of the pub, which stated that the outlet levies 10% service charge.

“I neither noticed it at the entrance nor saw it on the menu card when placing my order. When I informed them about the existing guidelines, the staff maintained that it was the management’s decision. I did not mind tipping the staff, but I felt I was forced to pay the 10% service charge,” he told TNM.

Time and again, the definition, legality and validity of ‘mandatory’ service charge on restaurant/hotel bills have been debated by both customers and restaurants. After receiving numerous complaints from consumers, the Consumer Affairs Department issued certain guidelines in April 2017, stating that paying service charge or the tip to staff, and how much to tip, is left to the discretion of customers, and that hotels and restaurants cannot compulsorily collect the amount from them.

This means that customers can decide if they are happy with the service of the staff and want to leave a tip or pay the service charge. If they do wish to tip, they can decide how much to pay, as opposed to the existing practice where some restaurants/hotels impose an amount on the customer, especially when the tip or service charge is paid to the staff and not to the service provider (restaurant/hotel).

Despite the government directive, many restaurants and hotels continue to levy 5% or 10% service charge in lieu of tips, in addition to the service tax or the GST on the food and service. Why? Because there is no law, as of yet, which legally makes service charge a voluntary or discretionary payment.

What the guidelines say

According to the Ministry of Consumer Affairs, Food and Public Distribution (Department of Consumer Affairs), hotels/restaurants have been charging customers tips/gratuity in the name of service charge without their express consent. It also noted that customers have been paying tips to waiters, in addition to the service charge, under the mistaken impression that service charge is part of taxes. In some cases, according to the department, the service providers have prevented customers from entering the premises if they are not in prior agreement to the mandatory service charge.

Based on complaints from consumers and as per the provisions of the Consumer Protection Act, 1986, here is what the guidelines by the department say about paying the service charge.

According to the guidelines, tip or gratuity paid by the customer, towards hospitality he or she received, is beyond the basic minimum service. The bill may clearly display that service charge is voluntary, and leave the column blank for the customer to fill up before making the payment.

Charging for anything other than the prices mentioned on the menu card and/or restricting the customer’s entry or forcing him/her to pay the service charge as a pre-condition to placing the order would amount to unfair trade practice. Additionally, the customer’s entry into the premises should not be considered as his/her consent to pay a fixed amount of service charge.

The customer can approach a Consumer Disputes Redressal Commission/Forum (of appropriate jurisdiction) and is entitled to be heard and redressed.

Why the confusion

More than two weeks after these guidelines were issued, the then Food and Consumer Affairs Minister Ram Vilas Paswan tweeted, “The service charge being taken from the consumer in the hostels and restaurants mandatorily has been declared illegal.”

Many consumers inferred that this is the law or the legal provision that prohibits or deems service charges ‘illegal’.

However, the Union government approved guidelines are only advisory in nature and not mandatory. Hence, in the absence of specific legislation, the ministry cannot take stringent action against this violation by hotels/restaurants or impose fines.

Incidentally, even the Consumer Protection Act, 2019 does not mention anything about service charge or tip.

“When a consumer files a suit, they can file it with provisions in the Act. But since the Consumer Protection Act does not mention anything on service charge, its interpretation is done by the court. While in the course of passing judgments, courts may issue guidelines to be followed by other courts. In some way, these judgments in itself will become the law or legal precedent,” explained Tapan Choudhury, a Supreme Court lawyer who also specialises in cases of intellectual property rights (IPR).

Another factor that has contributed to the ambiguity of service charge is its definition. The service charge defined by the government and the general definition vary in the intended purpose. 

The government defines service charge as a tip, or a direct transaction between the customer and the waitstaff.

Investopedia defines service charge as the charge paid directly to the company for the service rendered to the consumer or used for administrative or processing costs. It also adds that service charge is not a tip, which is paid to the employee who renders the service and is up to the customer.

The Hospitality and Food & Beverage (F&B) industries follow this definition of service charge, as a fee for the convenience of serving customers at restaurants/hotels.

How restaurants, hotels interpret

“Customers are not charged for good or bad service; they are being charged because they are being served. Whether the customer likes the service or not, it is up to them to tip the staff,” a popular Bengaluru restaurateur told TNM, on condition of anonymity.

A few months before the Union government approved the guideline, the National Restaurant Association of India (NRAI) had responded: “It is a matter of policy for a restaurant to decide if the service charge is to be levied or not. Information regarding the amount of service charge is to be clearly mentioned by restaurants on their menu cards or otherwise also displayed, so that customers are well aware of this charge before availing the services and can use their discretion of not using the facility offered by the restaurant.”

Clarifying further, the Bengaluru restaurateur added, “Service charge is not mandatory; hotels and restaurants can levy service charge, and customers don’t have to pay the service charge, provided they are aware of the charge and then choose to avail that service or not.”

Another ambiguity being debated is whether the service charge is taxable. The central and state governments levy GST on the bill value and do not specify service charge. The service tax is levied by the government and is fixed in every state.

Service providers, on the hand, say that service charge is taxable. “The service charge is an earning for restaurants and hotels, which is taxed by the government,” the restaurateur said.

According to the restaurateur, the service charges collected are often kept aside as a corpus fund, which is used for the existence and sustenance of the company. While nearly 100% of the service charge is seemingly allocated to staff, the entire amount may not be given to them at the time.

“The allocation of the service charge is done with the consent of the full staff,” the restaurateur added, explaining the different ways in which restaurants use the service charges they collect.

“During an emergency, some amount, sometimes even a lakh or above, is given to them from this corpus fund. The staff later repays the amount. Some restaurants/hotels absorb 2% of the amount as crockery, cutlery and glassware breakage charges, or for replacing the uniform of the staff. Some restaurants also have to clear non-paid bills by customers who absconded without paying,” he explained.

A 2018 survey conducted by LocalCircles, a citizen engagement platform, showed that only 12% of customers interviewed refused to pay service charge, 29% paid it and 32% said they either did not pay attention to the bill or did not visit a restaurant in July 2018. Among the 7,661 consumers surveyed, 27% said restaurants did not levy service charge.

“Paying the service charge comes down to a social understanding and attitude about the customers,” said the restaurateur. “The F&B industry is already under fire for Fire NOC (no-objection certificate), complaints from neighbours, parking and music. If it is eliminated completely, restaurants will increase the menu pricing by 7%.”

Not all restaurants and hotels, however, are in favour of levying service charges. Subramanya Holla, secretary of the Bruhat Bengaluru Hoteliers Association, said the association had stopped levying service charge.

“Some fine-dining restaurants put up a board saying they take service charge, which is an unfair trade practice. It is an additional charge and people will question it. Customers have to take this up and approach the consumer court. Instead of an advisory, there should be a law that addresses the legality of levying service charges,” said Subramanya, who is against the practice.

What the waitstaff say

Customers pay service charge considering it is a tip for the staff waiting on their tables. But this leads to the next question — does it really go to the waitstaff?

A waitstaff member at the fine-dining restaurant in Bengaluru, where the 10% service charge is discretionary (as mentioned on the menu card), told TNM that the amount goes to the staff. “The service charge collected per day is divided among the waitstaff,” the person said.

A staff member at another high-end resto-pub in Bengaluru, who has been working as a server for the last 12 years, said it wholly depends on the restaurant.

“Three restaurants I worked previously did not get the service charge. At the current restaurant, we get the service charge and salary separately but on a fixed date every month. While 90% of the service charge goes to the staff, rest is reserved to meet the breakage charge, as, monthly, we suffer Rs 7,000 worth breakage and spoilage,” the server told TNM.

Though the staff members get their service charge, it is not divided equally. “The amount is divided according to the hierarchy of the staff; the manager gets more than the housekeeping staff,” said the person, adding, “Many restaurants and hotels don’t pay their waitstaff the service charge, which could eventually discourage them from continuing the job.”

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