Legality of Service Charge Levied by Restaurants in India

Service Charge in Restaurant

What is Service Charge?

A service charge is an amount that is added to your bill in a restaurant to pay for the work of the person who comes and serves you. Most restaurants add a 10 per cent service charge. FHRAI ie., THE FEDERATION OF HOTEL & RESTAURANT ASSOCIATIONS OF INDIA is the voice of the Hospitality Industry and provides an interface between the Hospitality Industry and  Political Leadership, Academics, International Associations, and other Stake Holders.

FHRAI has stated that service charge, colloquially known as ‘tip’, is the amount paid to the staff of the restaurant or other similar establishment by its guest. In some instances, a restaurant may choose to include the service charge amount in the bill and the percentage may vary from 5 to 15 per cent of the value billed.

Is it mandatory to pay Service Charge levied by restaurants?

The Ministry of Consumer Affairs on Thursday told an industry body that levying ‘service charge’ on restaurant bills is illegal. The ministry is also likely to come up with a legal framework that among other things, will prevent hospitality establishments from levying the charge. The move is being planned to protect the interests of consumers.

The Department of Consumer Affairs (DoCA) has called FHRAI for a meeting to discuss about the matter on restaurant bills. As per an official release, the meeting was attended by major restaurant associations including National Restaurant Association of India (NRAI) and the Federation of Hotel and Restaurant Associations of India (FHRAI) and consumer organizations. Major issues raised by the consumers on the National Consumer Helpline of DoCA relating to service charge were discussed. Additionally, guidelines on fair trade practices related to the charging of service were also discussed along with other complaints of consumers.

Consumer Organizations observed that levying service charge is patently arbitrary and constitutes an unfair as well as restrictive trade practice under the Consumer Protection Act. Questioning the legitimacy of such charge, it was highlighted that since there is no bar on restaurants/hotels on fixing their food prices, including an additional charge in the name of service charge is detrimental to the rights of consumers.

On the other hand, the restaurant associations ie., NHRAI and FHRAI observed that when service charge is mentioned on the menu, it involves an implied consent of the consumer to pay the charge. Service charge is used by restaurants/hotels to pay the staff and workers and is not charged for the experience or food served to consumer. NRAI President Kabir Suri said levying service charge is “neither illegal, nor an unfair trade practice as alleged, and this debate in public domain is creating unnecessary confusion and disruption in smooth operations of restaurants. The service charge is transparent, worker friendly and is also recognized by many judicial orders which have been shared with the department. In addition, the government also earns revenue from the service charge as tax is paid by restaurants on the same,”

Meanwhile, FHRAI on Thursday said that a restaurant collecting service charge is neither illegal nor is in violation of the law. The association explained that a service charge, like any other charge collected by an establishment, is part of the invitation offered by the restaurant to potential customers.

It is for customers to decide whether they wish to patronize 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 charges 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 said.

Also, FHRAI cleared the doubt that the charge is disclosed in advance and the same is clearly printed as a separate heading in the bill as a “charge”, not a “tax.” Thus, there is complete transparency with regard to the amount, the rate and the purpose of the charge.

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