Service charge: Choice or Mandatory?

Dining out every week – a convenience 

The changing lifestyles of India’s growing middle class are pretty evident, not only from the point of view of increasing disposable incomes but also from the way its attitudes towards eating out have evolved. The growing number of new restaurant ventures is ample proof of the immense potential of the F&B sector.  Ask your grandparents or even your parents and they would tell you how back in the day, going to a restaurant with family or friends was a privilege and it was mainly for special occasions like birthdays or anniversaries, etc.  As of today, things have drastically changed. We no longer need a reason to dine out with our family or friends. As soon as the weekend arrives, we search for places to unwind and socialize. Trying out new places and getting acquainted with new cuisines is the trend, which is catching up fast. Changes in consumer behavior and the urge to eat out have led to a food evolution in India, or have they? Let’s find out.  For decades, the Indian restaurant industry had been focusing on food related to the prevailing lifestyle and diet culture. Almost all the families liked to eat home-cooked meals together and eating out was only an occasional event. However, quite recently, the eating habits of people in India have been impacted with the changing consumer habits. People today like eating out because it is cheap, convenient, tasty, and above all heavily promoted. The eating-out trend has different aspects to it, and the root cause of the evolution is the increasing consumer demand.

Service charge is very much legal?

In the last few days, while the Consumers Affairs Ministry has asked hotels and restaurant associations to stop compulsorily levying service charges on their bills, calling it “illegal”, the National Restaurant Association of India (NRAI) has argued that the service charge is “still very much legal” - until the government enforces a rule or legal framework deeming it otherwise. Given both parties’ contradictory stances – do you have a choice when it comes to the service charge the next time you head out to eat? Recently, the Consumers Affairs Ministry asked hotels and restaurant associations to stop compulsorily levying service charges on their bills, calling it illegal. Food and Consumer Affairs Minister Piyush Goyal asserted that restaurants cannot add the service charge to food bills, though customers can give tips as per their discretion while restaurants can raise prices to give hikes to their staff. As per an official release, the meeting was attended by major restaurant associations including the 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 charges were discussed. Additionally, guidelines on fair trade practices related to the charging of service were also referred to.

Dilemma of adding a restaurant service charge

The restaurant associations observed that when a 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 consumers. Consumer Organizations observed that levying service charges is patently arbitrary and constitutes an unfair as well as restrictive trade practice under the Consumer Protection Act. Questioning the legitimacy of such a charge, it was highlighted that since there is no bar on restaurants/hotels fixing their food prices, including an additional charge in the name of service charge is detrimental to the rights of consumers. In April 2017, the ministry issued guidelines on charging service charges by hotels/restaurants. The guidelines note that the entry of a customer in a restaurant cannot be construed as consent to pay a service charge. Any restriction on entry of the consumer by way of forcing her/him to pay a service charge as a condition for placing an order amounts to "restrictive trade practice" under the Consumer Protection Act. The guidelines mention that placing an order by a customer amounts to his/her agreement to pay the prices displayed on the menu card along with the applicable taxes. Charging for anything other than the aforementioned, without consent of the customer would amount to unfair trade practice as defined under the Act.

Service charges neither illegal nor an unfair trade practice 

As per the guidelines, a customer is entitled to exercise his/her rights as a consumer to be heard and redressed under provisions of the Act in case of unfair/restrictive trade practices. Consumers can approach a Consumer Disputes Redressal Commission / Forum of appropriate jurisdiction. A CEO and founder of a popular restaurant based in Mumbai, said, “The levying of service charge is neither illegal nor is it an unfair trade practice as alleged. GST is collected and paid on service charge, hence it is odd that the legality is being debated. Service charges exist in many industries but are termed differently. Aggregators call it a delivery fee, ticketing platforms call it a convenience fee, various government departments call it processing fees, and airlines and airports levy all sorts of fees and surcharges. Yet restaurants are being singled out as usual. We are always a soft target for the government.” She added, “Service charge exists for the benefit of restaurant staff and serves as an incentive to motivate employees. After extending zero support to the restaurant industry during the pandemic, it is unfortunate the government is now targeting the earning capacity of restaurant staff. Ultimately, this could set a poor precedent of government overreach and can lead to further undue influence in pricing policies across industries.” 

Recently, the Central Consumer Protection Authority (CCPA) barred hotels and restaurants from levying service charges automatically or by default in food bills and allowed customers to file complaints in case of violation. Amid rising complaints, the CCPA has issued guidelines for preventing unfair trade practices and violations of consumer rights regarding levying service charges. As per the guidelines, "No hotels or restaurants shall add service charge automatically or by default in the bill." No hotel or restaurant can force a consumer to pay the service charge. They have to inform the consumer that the service charge is voluntary, optional, and at the consumer's discretion." No restriction on entry or provision of services based on the collection of service charge shall be imposed on consumers," the guideline said.

Further, the service charge cannot be collected by adding it along with the food bill and levying GST on the total amount. The consumer may also file a complaint against unfair trade practices with the Consumer Commission. The Complaint can also be filed electronically through the e-daakhil portal www.edaakhil.nic.in for its speedy and effective redressal. Furthermore, the consumer may submit a complaint to the District Collector of the concerned district for investigation and subsequent proceeding by the CCPA. The complaint may also be sent to the CCPA by e-mail at com-ccpa@nic.in. 

Dining-in is a luxury service and it is for the employees that the restaurant levies a service charge. It is to incentivize the employees and give them a little extra for the service they provide to each table or customer. The service charge which goes to the employees makes them feel they are being taken care of and rewarded for their service over and above their salary. The CCPA guidelines have been stayed by the Delhi High Court recently and until the issue gets decided comprehensively, it remains to be seen how the consumers will react to the scenario of continued levying of service charges.

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References:

1.https://www.scconline.com/blog/post/2017/04/24/guidelines-on-charging-of-service-charge-by-hotelsrestaurants-issued/

2.https://www.hungryforever.com/evolution-dining-out-india/

3.https://www.livemint.com/news/india/eating-out-to-soon-get-cheaper-as-govt-mulls-framework-to-check-service-charge-by-restaurants-11654224144443.html

4.https://timesofindia.indiatimes.com/blogs/toi-editorials/eats-not-right-the-restaurant-service-charge-issue-is-about-an-important-consumer-rights-principle/

5.https://brandequity.economictimes.indiatimes.com/blog/tipping-point-is-service-charge-a-penalty-or-a-gracious-practice/91834280

6.https://indianexpress.com/article/explained/explained-what-is-the-service-charge-levied-by-restaurants-on-customers-7936185/

7.https://pib.gov.in/PressReleseDetailm.aspx?PRID=1839133