Service Charge issue: 7 reasons why it's not illegal
Service Charge issue: 7 reasons why it's not illegal

The Department of Consumer Affairs (DoCA) has announced that it will soon come up with a robust framework to ensure strict compliance by the stakeholders with regard to service charge levied by hotels and as it adversely affects consumers on a regular basis. Interestingly, the NRAI has also issued a clarification clarifying that service charges levied by the restaurants are very much legal and the Department of Consumer Affairs has yet to take a decision on the new framework amid reports circulating that the decision had already been taken.

The DoCA held a meeting on Thursday with restaurant associations and consumer organizations on the levy of service charge in hotels and restaurants. The meeting was chaired by Rohit Kumar Singh, Secretary, DoCA.

Major issues raised by the consumers on the National Consumer Helpline of DoCA relating to service charge were discussed. Additionally, guidelines on fair trade practices related to the charging of service were also referred to. The same issue has also came earlier in 2016-17, and restaurateurs have clarified the same to the government earlier also.

“In my opinion, everybody should understand that this service charge does not go to the restaurant owners but is mended for the welfare of the staff, especially the backend staff. Internationally also this has been acknowledged that whatever the guests pay as a tip goes to an individual. While we should finish off this tipping business from our industry so that it doesn't benefit just an individual. Instead, should be distributed across the organization's staff,” shared Col. Manbeer Choudhary, Chairman cum Managing Director, Jewels Group of Hotels.

He also added that this impression should be very clear to the government that this service charge is not just filling the pockets of the owners. This service charge is mended to share with the backend staff who are adding value to the work system and are equally contributing towards the hotel's functioning.

The experts also shared that the industry is very well within its rights and should charge service tax.

“Firstly, the levying 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 restaurant operations. Service charge exists in many industries. Aggregators call it a delivery fee, ticketing platforms call it a convenience fee, airports levy all sorts of fees and surcharges. Why are restaurants being singled out as usual? We are always a soft target for the government,” pointed Rachel Goenka, CEO & Founder of The Chocolate Spoon company.

On the other hand, FHRAI also shared that a restaurant collecting service charge is neither illegal nor is in violation of the law. The association explained that a service charge, like any other charge collected by an establishment, is part of the invitation offered by the restaurant to potential customers. It is for customers to decide whether they wish to patronise the restaurant or not, FHRAI said in a press statement.

“A service charge is meant for the benefit of the staff and so, some establishments make a conscious choice to adopt a policy beneficial towards its staff members. Levying service charge is a general practice adopted across the globe. It is neither illegal nor violating any law. Each establishment is free to create its own policy in this regard," shared Gurbaxish Singh Kohli, VP, FHRAI.

Here are top points to look after as per the restaurant association when we talk about service charge and why it is important:

• 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.

• Information regarding the amount of service charge is clearly mentioned/displayed by restaurants on their menu cards and otherwise also displayed on the premises, so that customers are well aware of this charge before availing the services.     

• After a 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. 

• Once a customer places an order, a contract comes into existence, there is an offer by the restaurant to provide the food on the menu and it is up to the customer to accept the offer of the restaurant or not while placing his order in the restaurant. The customer has to exercise the option at that point of time whether to accept the offer of the price of the product plus service charge or not to accept the said offer. The option cannot be exercised after consuming the food and complaining about the levy of service charge. Accordingly payment of service charge is not made optional for the customers after accepting the offer and placing the order for the service. 

• Levy of service charge is beneficial for the workmen as a class who are employed in the establishments.  Any move to the contrary would be detrimental to the interests of workers – and against the labour-friendly stance of the Government. 

• It also brings in revenue to the Government, since tax is paid on the same. 

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