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Volume IconAre eateries taking service charges illegally?

On Monday, the government said that eateries were illegally charging service tax from consumers. The eateries association, on its part, has denied it. Are eateries taking service charges illegally?

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As pandemic waned and eateries sprung back to life, the old controversy surrounding service charges at restaurants has again come to the fore.

After complaints, the Department of Consumer Affairs has warned restaurants across the country against forcibly levying the charge. The government has also called a meeting with restaurant association to discuss the contentious issue.

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In a letter to the National Restaurant Association of India, which represents the interests of 5 lakh plus restaurants, Consumer Affairs Secretary Rohit Kumar Singh pointed out that restaurants have been collecting service charge from consumers by default, even though payment of any such charge is voluntary and at the discretion of consumers and not mandatory as per law.

It has scheduled a meeting with NRAI on June 2nd to discuss four issues pertaining to service charge levied by eateries.

The meeting follows the government taking notice of a number of media reports as well as grievances registered by consumers on the National Consumer Helpline (NCH).

The department’s letter points out that consumers are forced to pay service charge, often fixed at arbitrarily high rates by restaurants. They are also being falsely misled on the legality of such charges and harassed by restaurants on making a request to remove such charges from the bill amount.

Department of Consumer Affairs has already published guidelines in April 2017, which note that the entry of a customer into a restaurant cannot by itself be construed as consent to pay the service charge.

Any restriction on entry on the consumer by way of forcing him to pay the service charge as a condition precedent to placing an order of food and beverages amounts to ‘restrictive trade practice’ as defined in the Consumer Protection Act.

The guidelines mention that placing of an order by a customer amount to his agreement to pay the prices displayed on the menu card along with the applicable taxes. Charging for anything other than that, without the express consent of the customer, would amount to unfair trade practice as defined under the Act.

Anku Sharma, Associate Director - Competition, Spice Route Legal says the Govt will take proactive steps on issues concerning the public at large. Very few restaurants that take service charge are following 2017 guidelines, he says. Dept of Consumer Affairs guidelines are recommendatory. 

Needless to say, the restaurant industry has a different view.  The NRAI, in a statement yesterday, claimed there was no illegality in levying such a charge and whether or not to levy a service charge is a matter of individual restaurant policy. 

It argued that once the customer, who is made aware of such a charge in advance, decides to place the order, it becomes an agreement between the parties, and is not an unfair trade practice.

GST is also paid on the service charge, the association added. Another industry body, the Federation of Hotel & Restaurant Associations of India, had in 2017 said that while the rights of the consumers are paramount, the rights of individual establishments should not be impinged upon. 

Are there merits to the industry’s arguments?

Anku Sharma of Spice Route Legal says the agreement remains between restaurant and customer. Ultimately, it boils down to how much the govt can interfere with private contracts, he says.

The Consumer Affairs Department had in April 2017 said that paying service charge or the tip to staff should be left to the discretion of customers and it should not be binding. It is high time that the government sets the record straight on this issue which has been dragging on for years. The meeting called by the government may be a step in the right direction. 

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First Published: May 25 2022 | 7:00 AM IST

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