Service Charge in Restaurants: What's the Controversy? What Do Guidelines Say?

What exactly are service charges? Do you have to pay it mandatorily? Here's all you need to know.

What exactly are service charges? Do you have to pay it mandatorily or not? Here's all you need to know. Image used for representation.

(Photo: iStock)

The central government will soon come out with a legal framework to stop restaurants from levying service charges on customers as the practice is "unfair," Consumer Affairs Secretary Rohit Kumar Singh said on Thursday, 2 June.

After a meeting with representatives of restaurant associations as well as consumers, Singh said that although restaurant representatives claim the practice is legal, the Department of Consumer Affairs termed it an "unfair trade practice" because it adversely affects the rights of consumers.

What exactly are service charges? Do you have to pay it mandatorily or not? Here's all you need to know.

What is a service charge?

It is essentially a tip that is paid for the services rendered.

In a restaurant/hospitality industry, it is a direct transaction between the customer and the service/wait staff.

What is the controversy?

In a letter on 23 May, Consumer Affairs Secretary Rohit Kumar Singh wrote that restaurants and eateries were now collecting service charge by default, and that customers were forced to pay it.

“It has been pointed out in the letter that consumers are forced to pay service charge, often fixed at arbitrarily high rates by restaurants. Consumers are also being falsely misled on the legality of such charges and harassed by restaurants on making a request to remove such charges from the bill amount,” the letter said.

“Since this issue impacts consumers at large on a daily basis and has significant ramification on the rights of consumers, the department construed it necessary to examine it with closer scrutiny and detail,” it added.

But what do government guidelines say on levying service charge?

The guidelines from April 2017 say that paying a service charge or tip to staff, how much tip etc, is left to the discretion of the customers.

“Tips or gratuity paid by a 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 guidelines noted.

Customers are not to pay tips to waiters under the assumption that it is a part of the mandatory taxes.

Forcing a customer to pay for service charge after placing an order is a "restrictive trade practice," the guidelines added.

What was on the agenda for the 2 June meeting?

The meeting was attended by representatives of the National Restaurant Association of India (NRAI), Federation of Hotel & Restaurant Associations of India (FHRAI), and consumer organisations, including Mumbai Grahak Panchayat and Pushpa Girimaji.

• Restaurants making service charge mandatory in the guise of some additional fee

• Not revealing to customers that it is optional for them to pay it

• Resisting customers who refuse to pay service charge

What are restaurants saying?

The National Restaurant Association of India (NRAI) on 23 May said that there is no illegality in levying service charge.

"Information regarding the amount of service charge is mentioned/displayed by restaurants on their menu cards and otherwise also displayed on the premises, so that customers are well aware of this charge before availing the services," the NRAI said.

"Once the customer is made aware of such a charge in advance and then decides to place the order, it becomes an agreement between the parties, and is not an unfair trade practice. GST is also paid on the said charge to the government," the industry body added.

It is for customers to decide whether they wish to patronise the restaurant or not, FHRAI said in a separate statement.

"... a service charge is meant for the benefit of the staff and so, some establishments make a conscious choice to adopt a policy beneficial towards its staff members. Levying service charge is a general practice adopted across the globe. It is neither illegal nor violating any law. Each establishment is free to create its own policy in this regard."

FHRAI Vice President Gurbaxish Singh Kohli

What happens when a restaurant collects mandatory service charge?

In such a situation, the consumer can approach the Consumer Disputes Redressal Commission/Forum and is entitled to be heard and the complaint redressed.