The service charge pickle

Govt should not meddle with market functioning

The Department of Consumer Affairs (DCA) has recently issued a notification in which it has asked states to advise “hotels and restaurants to disseminate information… that service charges are discretionary and voluntary and a consumer dissatisfied with services can have it waived”. In essence, it is okay for a customer to refuse to pay the service charge (roughly 5-20 per cent of menu costs of the items consumed), even after consuming the meal, regardless of whether or not one enjoyed the service. The DCA consulted with one industry body, the Hotel Association of India, before issuing the ruling and it believes that this ruling is consistent with the Consumer Protection Act (CPA), 1986.  However, another major industry body, the National Restaurant Association of India (NRAI), feels that the billing of explicit service charges is equally consistent with the CPA and has vigorously opposed the DCA order.

The dichotomy within the Indian hospitality industry is itself a pointer to major differences in billing practices. Printing an explicit service charge on the menu is common, but by no means a universal practice. Indeed, at the lower price end in the informal sector, even printed bills are not common. On the other hand, many high-end restaurants prefer to charge higher menu prices rather than bill for an explicit service charge. There are large cultural differences across the world in this regard. In Singapore, Brazil and the UK, service charges are billed as separate items and the payment is mandatory. In America, Europe and Japan there is rarely, if ever, an explicit service charge. Indeed, it would be illegal in France. In Japan, tipping is considered rude and the hospitality industry keeps generous margins and shares profits with employees. But in America, a generous “tip” of 15-20 per cent is customary. In fact, the American hospitality industry is allowed to pay lower than minimum wages on the assumption that service personnel will receive such compensation.

Ultimately, this is not really about splitting hairs on subtle interpretations of the CPA. It is about leaving the market to deal with a commercial issue, where widely varying practices are prevalent. The tipping habits of Indians are unlikely to change in a hurry. Moreover, consumers view the overall cost of meals holistically. If they do not like the food or the service at a given restaurant, or they do not consider a meal value for money, they will not return for a second meal. If they do like it, they might even leave a tip in excess of a printed service charge. Those dynamics are universal and they will not be changed by this notification. 

Yet, there is a distinct sense of reneging on a market contract, even though an implicit one, when, as the DCA suggests, a customer refuses to pay after being served. On the flip side, the customer has the right to know all the costs involved. The way forward should be that all restaurants should be mandated to clearly state to the customer if they levy a service charge, and if so, the exact percentage of such a charge. Once a customer accepts those terms and avails of the service, they should not refuse payment. In case of any grievance on account of either the food or the service, there are enough avenues such as consumer courts for seeking redressal.