[Editorial] Restaurant Service Charges

What are the components of food bill?

• In a standalone restaurant, a food bill comprises of:

1. 1. Food charge (from the menu)
   2. Service charge (5-15%)
   3. 5% GST on this amount (IGST + SGST)

• In a restaurant located within a hotel (where the room rate is above 7,500 INR- like in case of 5 star hotels), the food bill comprises of:

1. 1. Food charge (from the menu)
   2. Service charge (5-15%)
   3. 18% GST on this amount (IGST + SGST)

What is service charge?

• Service charge can be understood as the ‘tip’ and is equivalent to what is known as ‘gratuity’. It is found printed at the bottom of the menu and is identifiable from the asterisk mark.
• This service charge is generally decided by the restaurants on their own.
• As per law, GST is a mandatory component of restaurant bill. However, the service charge is an optional component.
• Such variable fees, as service charges, are not unique to the restaurant industry. Customers encounter such charges under various names in different services. Eg: ‘restaurant charges’ in food delivery services and ‘convenience fee’ in ticketing platforms.
• In the restaurant industry, service charges garners a lot of hostility as customers believe that it isn’t something that they should pay.

Why is service charge important for restaurants?

• According to the restaurants, a huge portion of these charges goes to the staff and the rest goes into a welfare fund.
• They hold that these charges act as incentives for the staff, who are paid their salaries separately. Note that these charges are linked to the restaurant’s sales and are independent of wages.
• ‘Front of the house’, i.e. the workers who interact with the patrons, aren’t the only staff in a restaurant. Many staff members work in the background and are at a disadvantage, when it comes to tips from patrons.
• Patrons may choose not to pay the charge and directly tip the servers. In such cases, the backroom staff don’t get anything. Restaurateurs hold that service charge ensures equitable distribution of tips and discourages inappropriate incentives.
• Given the changes in the real estate– especially in the metros and high streets- restaurants rarely pay a fixed rent. Instead, they have a ‘revenue share’ clause in their lease contracts. This shared revenue doesn’t include the service charges, as it is recognized, not as the restaurant’s revenue, but as a component for distribution among the workers.
• Restaurateurs are not ready to increase menu prices to account for these service charges. Such an inclusion would mean that they would have to renegotiate rental agreements to their disadvantage.

What are the recent developments?

• Over the years, the legality of service charges has been considered by the courts, National Consumer Disputes Redressal Commission, Monopolies and Restrictive Trade Practices Commission and Income Tax Appellate Tribunal. These charges have been upheld in various judgements.
• Recently, the Department of Consumer Affairs (under the Ministry of Consumer Affairs, Food and Public Distribution) called a meeting with the National Restaurant Association of India (NRAI- the umbrella restaurant body) over the topic of service charges.
• The Center held that the restaurants have been collecting service charges by default, even though such charges are voluntary and the customers may choose not to pay them (given they aren’t mandatory as per law).
• The Ministry held that even if a consumer is aware of its voluntary nature and wants either to remove it or to directly tip the server, the burden falls on them to convince the restaurant management as to why they want to do so.
• The Department held that they have received complaints saying that this is spoiling the dining experience and is leading to public embarrassment.
• It also raised concern over the lack of transparency over where this charge goes.
• The Department held that collecting such charges on their own and paying GST on it doesn’t make it an authorized practice.
• The consumer affairs ministry had put out the ‘Guidelines on Fair Trade Practices Related to Charging of Service Charge from Consumers by Hotels/ Restaurants’:
  • This guidelines held that the service component is inherent in the provision of food and beverages and hence, the product’s pricing is to cover the both the components- goods and services.
  • Charging tips in the name of service charges, without the customer’s express consent, amounts to unfair trade practice.
  • The food bill may clearly display that service charge is voluntary. The service charge column could be left blank for the customer to fill, before paying the bill.
• Recently, the Central Consumer Protection Authority issued guidelines:
  • Restaurants cannot add service charges by default.
  • Service charges cannot be collected under any other name.
  • Restaurants can’t force consumers to pay service charges and are required to communicate that these charges are optional.
  • Restaurants can’t restrict the entry of or provision of services to consumers, based on the service charge collections.
  • Service charges can’t be collected by adding it to the food bill and levying GST on the entire amount.
  • Complaints can be lodged via National Consumer Helpline, the number 1915, the NCH app or the edaakhil portal.

What is the way ahead?

• The NRAI has stated that levying these charges is a matter of the restaurants’ individual policy and there isn’t any illegality in it. It holds that service charges information is displayed in restaurants’ premises for the customers to see.
• As the customer is made aware of such charges in advance, their decision to place an order becomes an agreement between the customer and the restaurant- not an unfair trade practice.
• NRAI has accused the ‘vilification of service charges’ as discriminatory and stemming from ‘ignorance, half truths and unwillingness to listen’. It also pointed out that it is an infringement on their economic freedom, especially as the restaurant industry still cannot claim tax inputs under GST regime.
• There is a concern that going ahead with the recent guideline would be a throwback to the licence raj– when heavy handed interventions smothered economic development.
• Restaurants are already battered by the pandemic. In such times, a charge designed to help those employed in the sector would not be objectionable to many.
• As there are alternatives and lack of uniformity in service charges, there isn’t any restriction on freedom of choice i.e. the consumer isn’t being coerced.
• Ensuring that the service charges are clearly communicated to the consumers is something that can be done.