Statute On Service Charge: A Pressing Need In The Country

History and Concept of Service Charge

Service charge is a type of 'Tip' or 'Gratuity' which is charged by the hotels and restaurants for the services that are provided by them to the consumers. It is generally added to the bill and the rate is decided by hotels or restaurants only. However, this service charge is not defined anywhere in the law.

According to restaurants, a large portion of these fees goes to the staff, with the remainder going into a welfare fund. The customers have an option of skipping the fee and tipping the staff instead. The backroom staff, in such circumstances, receive nothing.

Restaurant owners assert that the service charge ensures a fair distribution of tips and deters unsuitable incentives.

Difference between Service Tax and Service Charge?

Service charge is different from service tax. Service tax is levied by the government and it regulates the rate of taxes in the whole country. The service tax is levied under the Finance Act of 1944.

Service charge, on the other hand, is an additional cost charged by the restaurant that varies from one to the next. It is a method of covering 'tip', as many customers in India do not tip. It is similar to paying extra to the food delivery apps or convenience fees to various service providers.

Looking at the history of service charges, before they were essentially mandated, there was no policy to regulate these charges. The service charge amount is set by the hotel/restaurant and is automatically added to the invoice. The hotel/restaurant has full control over the service charges.

However, after receiving several complaints about service charges in consumer forums, the Ministry of Consumer Affairs issued guidelines in 2017 to empower the consumers. This directive allows consumers to choose whether to pay and how much to pay. Consumers are benefited from these guidelines and hotels/restaurants still have the option of collecting service charges. There are several cases filed where many orders have been passed in favour of hotels/restaurants, somehow allowing them to levy service charges on the consumers for the service they render.

After these judgments and non-mandatory guidelines, the hotel/restaurant keeps including the service charges in the invoice without the express consent and authorization of the consumer. To restrict such malpractices, CCPA has recently issued new guidelines that completely restrict hotels/restaurants from adding service charges in their invoices by default. Guidelines have been issued to assist consumers and protect them from unfair trading practices.

Guidelines issued by CCPA

On 2 July 2022, the Government held a meeting with the National Restaurant Association of India (NRAI), Federation of Hotel & Restaurant Associations of India (FHRAI) and consumer organizations because of various complaints on levying of service charges without their consent. On 4 July, the Central Consumer Protection Authority(CCPA) issued guidelines that bars hotels and restaurants to levy service charges automatically in the bill. They have also issued guidelines that have to be followed by the hotels or restaurants to protect consumer interests and prevent unfair trade practices. The guidelines are as follows:-

1. The hotel and restaurant shall not automatically or by default, add the service charges in the bill.

2. The hotels and restaurants shall not collect the service charges by any other name in the bill.

3. No hotel or restaurant shall force a customer to pay a service charge and shall clearly inform the customer that the service charge is voluntary, optional, and entirely at the discretion of the customer.

4. Most notably, hotels and restaurants are no longer permitted to charge service fees to limit admission or services.

5. The service charge will not be collected by adding it to the food bill and levying GST on the total amount.

The CCPA has also notified a consumer complaint mechanism to be resorted to if a consumer finds that these guidelines are violated by a hotel or restaurant. If consumers notice a service charge on the bill, they have four options with varying levels of escalation.

Firstly, they can ask or request that the service charges be removed from the bill. If not, they can file a complaint with the National Consumer Helpline (NCH), which serves as an alternative dispute resolution mechanism. Still, no consumer can complain to Consumer Commission through the e-daakhil portal. And fourth is where a consumer can file a complaint with the District Collector of the relevant district for investigation and subsequent CCPA proceedings.

What prompted the issuance of these new guidelines? Are they efficacious?

The guidelines which were issued in 2017 granted the consumers discretionary power whether or not to pay service charge. The guidelines had directed hotels/restaurants to leave the service charge column blank so that consumers can fill the amount before making the payment. The hotel/restaurant cannot charge other prices, other than those mentioned in the menu and cannot force consumers to pay service charges.

Despite the government mandate, many restaurants and hotels continue to apply a 5% or 10% service charge in lieu of gratuities, in addition to the service tax or GST on the food and service. These guidelines were violated because there is no specific law that makes service charge discretionary to the consumers.

After receiving several complaints regarding the levy of service charge without express consent and authorization of consumers, CCPA has issued these new guidelines to safeguard them from such unfair trade practices. The CCPA has directed that no hotels/restaurants can add service charges in the invoice by default or collect the same by adding it with any other name. Hotels/restaurants have to specifically mention that service charges are completely discretionary and voluntary to the consumers before placing the order.

These guidelines are biased toward the consumers and completely ignore the interests of hotels/restaurants and their staff members. The consumer never wants to pay tip, and if it is completely discretionary whether to pay or not to pay, hotels/restaurants will never be compensated for the services they render.

As of now, the service charge cannot be collected, and employees and staff of hotels/restaurants may get dissatisfied and look for other job options. There will also be a burden on the owners of the hotels/consumers to pay more salary to their staff to keep them satisfied. If the service charge is not collected, to transfer the burden, the hotels/restaurants will increase the prices, which will ultimately be borne by the customers.

The aim of guidelines is to safeguard the consumers, but, ultimately it is consumers who have to bear the burden of service charges. Only the state benefits from these restrictions since when hotels/restaurants raise their prices, the state's taxable income also rises. The state ultimately benefits and the consumer has to bear the consequences.

Because of the aforementioned issues, the new standards are ineffective and will need more work to balance the interests of all stakeholders. It is high time that service charge is brought under the domain of legislation so that it can be regulated effectively.

Legal and regulatory aspects of Service Charges in India

Customers and restaurants have repeatedly debated the definition, legality, and validity of 'mandatory' service charges on restaurant/hotel bills. Before the guidelines, hotels and restaurants charged 5 to 10 percent of service charges along with service tax or GST on the bill.

Following complaints, the Ministry of Consumer Affairs discovered that hotels/restaurants are charging consumers tips in the form of service charges without their express authorization. In addition to the service charge, customers may be sometimes directly pay tips to the staff, which leads to the double payment of gratuity as consumers are not aware of the service charges. Based on these complaints, the Department of Consumer Affairs has issued the guidelines in 2017 under the provision of the Consumer Protection Act, 1986.

According to the guidelines, the service charge is optional, and the column may be left blank for the consumer to fill out before making the payment. If any price other than those mentioned on the menu is charged or consumers are forced to pay service charges without their consent, it would amount to unfair trade practices. Because these guidelines are only advisory and not mandatory, as there is no specific statute or legislation to regulate the service charge, the Ministry cannot take harsh or stringent action if they are violated.

Though there is no legislation, there are some judgments of the Supreme Court, where it has been held that hotels/restaurants can charge extra above the price as compensation for their services. In the case of the Federation of Hotels And Restaurant Association of India vs Union Of India And Ors, the Court said that "The customer does not enter a hotel or a restaurant to make a simple purchase of these commodities. It may well be that a client would order nothing beyond a bottle of water or a beverage, but his direct purpose in doing so would travel to enjoying the ambience available therein and incidentally to the ordering of any article for consumption."

In another case of M/s. Hotel Savoy Bar & Ors. vs. The State of Kerala & Anr, the Court held that "the overcharging of MRP of beer was justified because the customer was paying not only for the product but also for satisfactorily rendered services and the ambience."

Because of these judgments, hotels/restaurants inferred that they can levy service charges on the consumers for the services they were rendering.

Also, in the current scenario, even after replacing the Consumer Protection Act of 1986 with the new Consumer Protection Act, 2019, there is still no specific provision regarding the service charges.

As these guidelines are also not based on any statute or specific provision of law, they cannot be held as mandatory for hotels/restaurants. They are still free to levy service charges on the consumers.

Status after Guidelines were issued

After issuing the guidelines, many hotels and association have raised the contentions that levying service charge is not illegal as there is no provision or statute that regulate the service charge. NRAI has issued a statement that "On behalf of the entire restaurant industry, we have firmly reiterated all facts with proof to the Department that levy of service charge is neither illegal, nor an unfair trade practice as alleged, and this debate in the 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."

NRAI has also raised a contention that "How can service charges be illegal if they are saying 'we will create a legal framework? If there is no legal framework, then how is it illegal? We are not the only industry which charges for service. Cinema ticket booking portals charge convenience fees, delivery apps have delivery charges. If the law says we can't charge it then we will not charge it. But till then it's not illegal."

NRAI has also contended that the relationship between hotel/restaurant and customer is a contractual relationship. If customers agree to the terms and conditions and are ready to pay the prices mentioned in the menu by their consent, it forms a binding contract between them, and both parties are in a compulsion to perform their contractual duty and no third party has the right to interfere in the contractual obligations formed between these two parties.

NRAI has filed a petition in the Delhi High Court challenging these guidelines on basis of these arguments. The Delhi High Court has stayed these guidelines on the condition that hotels/restaurants ensure that service charges must be duly and prominently displayed on the menu or other places and should not be charged on take-away orders. The matter is still subjudice before the High Court.

CONCLUSION

The guidelines are primarily intended to protect consumers' interests and to avoid unfair trade practices carried out by hotels/restaurants under the guise of service charges. The Ministry of Consumer Affairs released the guidelines in 2017 and again in 2019 stating that service charges are fully optional and it is up to the consumers whether to pay or not.

The National Restaurant Association argued that since there is no specific statute or legislation to regulate the service charges, the government cannot restrict them from collecting service charges.

Given that this argument has raged for many years, we believe that it is high time for the government to enact new legislation or regulations to govern service charges. Government cannot enforce guidelines simply by issuing them without clear legal backing to support them.

It is the need of the hour that service charges are brought under some legal framework so that it can be regulated, and for that, the government must enact legislation that protects the interest of both sides. Government should draft the bill and discuss it in the parliament, there should be a proper debate and discussion so that an effective legislation can be enacted. There must be an effective watchdog for speculation which puts a cap on the prices so that they are not manipulated against the objective of the legislation and the interests of the consumers, thereby maintaining the balance. The government should enact legislation that protects consumers from unfair trade practices and also protects the interests of all the stakeholders.

Ramit Mehta is an Advocate at Rajasthan High Court and Managing partner of Mehta Chambers and Aashay Jain is a Student at the Institute of Law, Nirma University.

[The opinions expressed in this article are those of the author. Verdictum does not assume any responsibility or liability for the contents of the article.]