Tax Reforms

Hotels cannot force customers to pay Service Charge: Centre


From UPSC perspective, the following things are important :

Prelims level: NA

Mains level: Unfair practices against consumer rights

The Central Consumer Protection Authority (CCPA) issued guidelines asking hotels and restaurants not to collect service charge from customers.

We often get to hear in news. Once a person had used a loo at a hotel in our national capital. She was charged ₹499 as a service charge in return of purchasing a water bottle!

What is the news?

  • Under the guidelines, consumers can lodge complaints against hotels and restaurants by calling the number 1915.
  • The CCPA has issued guidelines under Section 18 (2) (I) of The Consumer Protection Act, 2019.
  • The CCPA was established in July 2020 to promote, protect, and enforce the rights of consumers as a class, and to investigate, prosecute, and punish violators.

What are the guidelines?

  • The CCPA has issued five major guidelines regarding the levy of service charge by restaurants and hotels, which has for long been a contentious issue and has periodically triggered complaints from consumers.
  • The guidelines say:
  1. No hotel or restaurant shall add service charge automatically or by default in the bill;
  2. Service charge shall not be collected from consumers by any other name;
  3. No hotel or restaurant shall force a consumer to pay service charge and shall clearly inform the consumer that service charge is voluntary, optional, and at the consumer’s discretion;
  4. No restriction on entry or provision of services based on collection of service charge shall be imposed on consumers; and
  5. Service charge shall not be collected by adding it along with the food bill and levying GST on the total amount.

What can a consumer do in case of a violation of these guidelines?

  • The consumer has four options at different levels of escalation in case she spots the levy of service charge in her bill.
  • First, she can make a request to the hotel or restaurant to remove the service charge from her bill.
  • Second, she can lodge a complaint on the National Consumer Helpline (NCH), which works as an alternative dispute redressal mechanism at the pre-litigation level.
  • The complaint can be lodged by making a call on the number 1915, or on the NCH mobile app.
  • Third, the consumer can complain to the Consumer Commission, or through the edaakhil portal,
  • Fourth, she can submit a complaint to the District Collector of the concerned district for investigation and subsequent proceedings by the CCPA.
  • A consumer can complain directly to the CCPA by sending an e-mail.

What are the components of a food bill?

  • A restaurant bill in India comprises food charge (from the menu), with an addition of service charge (anywhere between 5 to 15 per cent) and a 5 per cent GST on this amount (IGST+SGST).
  • This is for all kinds of standalone restaurants.
  • In case a restaurant is located inside a hotel wherein room rate is upwards of Rs 7,500 (mostly in case of five-stars), the GST would be 18 per cent.

Nature of Service charge

  • While the GST is a mandatory component as per law, the service charge is supposed to be optional.
  • It is the equivalent of what is known as gratuity around the world, or tip, in casual parlance.
  • Most restaurants decide the service charge on their own, and print it at the bottom of the menu with an asterisk.

What do the restaurants say?

  • The levy of service charge by a restaurant is a matter of individual policy to decide if it is to be charged or not.
  • There is no illegality in levying such a charge.
  • 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.

Where does the fund go?

  • Restaurants claim that a major chunk of the service charge thus collected goes to the staff, while the rest goes towards a welfare fund to help them out during good and bad times.
  • It’s a default billing option, even as customers can choose not to pay it if they don’t want to.
  • Of course, they are paid the salaries but the service charge works as an incentive for them.
  • Restaurateurs also say that patrons can decide not to pay the charge and tip the server directly, but in this case, the backroom staff doesn’t get anything.
  • A service charge ensures all staff members are rewarded evenly.

What is the issue then?

  • The issue is that almost all restaurants have put service charge (fixed at their own accord) as a default billing option.
  • And if a consumer is aware that it is not compulsory and wants it removed or wants to tip the server directly, the onus is on them to convince the management why they don’t want to pay it.
  • The department says they received several complaints saying it leads to public embarrassment and spoils the dining experience since at the end of it, they either pay the charge quietly and exit the place feeling cheated, or have to try hard to get it removed.
  • Also, there is no transparency as to where this charge goes.
  • The officials also say that collecting service charge on their own and paying GST on it to the government doesn’t make it authorised.

Problems faced by customers

  • It is this component which has come under dispute from time to time, with consumers arguing they are not bound to pay it.
  • It also said that hotels and restaurants charging tips from customers without their express consent in the name of service charges amounts to unfair trade practice.


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