Service Charge in Restaurants/Hotels

What’s in Today’s Article?

• Why in News?
• What is Service Charge?
• Nature of Service Charge in Restaurants/Hotels
• Background of the Present Case
• Why did CCPA Issue Such Guidelines?
• News Summary

Why in News?

• The Delhi High Court in an interim order has directed members of the Federation of Hotel and Restaurant Association of India (FHRAI) to replace the term ‘service charge’ with ‘staff contribution’.

What is Service Charge?

• A service charge is a fee charged to customers for something specific, such as a bank charging a fee for using an ATM that's not part of its network or a vendor charging a fee for making a payment with a credit card.
• It also may be called a customer service fee or maintenance fee.
• Restaurants and hotels generally levy a service charge of 10% on the food bill.

Nature of Service Charge in Restaurants/Hotels:

• 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.

Background of the Present Case:

• In July 2022, the Central Consumer Protection Authority (CCPA) had issued guidelines that restaurants or hotels should not automatically add service charge to the bill or collect it from consumers under any other name.
• The National Restaurant Association of India (NRAI) and the FHRAI challenged this order in the Delhi High Court.
• Subsequently, last year, the Delhi High Court had stayed the CCPA guidelines subject to the association members ensuring that the levying of service charge in addition to the amount and taxes is “duly and prominently displayed on the menu or other places” along with the customer’s obligation to pay the same.
• The Ministry of Consumer Affairs and the CCPA also informed the High Court that over 1,105 complaints were registered by consumers on the National Consumer Helpline after the guidelines regarding unfair levying of service charges were issued.
• After this, the court granted time to the petitioner associations (NRAI & FHRAI) to respond to the government’s stand while extending the interim stay.

Why did CCPA Issue Such Guidelines?

• 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.
• 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, 2019.
• If any consumer finds that a hotel or restaurant is levying a service charge in violation of the guidelines, he/she can request the concerned establishment to remove it from the bill amount.
• Consumers can also complain to the National Consumer Helpline (NCH), which works as an alternate dispute redressal mechanism at the pre-litigation level, by calling 1915 or through the NCH mobile app.
• They can also file complaints with the Consumer Commission. The complaint can be filed electronically through the e-Daakhil portal for its speedy and effective redressal.
  • E-Daakhil is an online portal launched by the Indian the National Consumer Disputes Redressal Commission (NCDRC) in 2020 for facilitation of offline and online complaints relating to the Consumer Protection Act, 2019 by consumers.

News Summary:

• The Delhi High Court in an interim order has directed members of the Federation of Hotel and Restaurant Association of India (FHRAI) to replace the term ‘service charge’ with ‘staff contribution’.
• The High Court also directed that the such amount should not exceed 10% of the total bill (excluding GST).
• Going forward, the restaurants will now have to specify on their menus in bold that tips need not be given after staff contribution is paid.

Q1) What is Cess Tax in India?

A cess is a kind of add-on tax the Indian government levies for collecting purpose-specific funds. For instance, the education cess on income tax proceeds is used to fund the country's development of primary, secondary, and higher education facilities.

Q2) What do you mean by Welfare State?

The welfare state is a way of governing in which the state or an established group of social institutions provides basic economic security for its citizens. By definition, in a welfare state, the government is responsible for the individual and social welfare of its citizens.

Source: What Delhi HC said on service charge: Use term ‘staff contribution’, amount can’t be over 10% of bill