Aug 06,2022 | 7 min read

What is Service Charge, and what does the Government say about it?

Meaning of Service Charge 

The tax system in India is an extensive one. There are many types of taxes that one has to pay as an upstanding citizen. Taxes are of two types:

  1. direct tax: includes Income Tax, Wealth Tax, Gift Tax etc.

  2. Indirect tax: including GST, Sales Tax, VAT, etc.

 

Apart from these two types of taxes, there are other types of payments due against a citizen if (s)he avails of any government or commercial services like cess, fees or surcharges

The usual bill in an Indian restaurant charges for the food (menu), service charges ranging from 5%-15%, and 5%-10% GST (IGST + SGST). While adding GST is legally mandated by the Government, adding a service charge is at the restaurant's discretion. Service Charge is homologous to 'tipping', which is prevalent in western countries.

The Issue

The main issue is whether it is legal or illegal to levy service charges? 

The Ministry of Consumers Affairs, regarding the charge as legal, has stated that "a component of service is inherent in the provision of food and beverages ordered by a customer, and therefore the pricing of the product is expected to cover both the goods and service components". It also stated that levying tips from customers "without their express consent in the name of service charges" amounts to unfair trade practice. 

The Central Consumer Protection Authority (CCPA) released a guideline that states that restaurants can't force customers to pay service charges because it is voluntary. Restaurants are not allowed to collect service charges by default along with the food bill. Additionally, they can’t levy GST on the total bill amount.

Customers can also lodge complaints to National Consumer Helpline by calling 1915 or contacting them through the mobile app.

What does the NRAI have to say about it?

The National Restaurants Association of India (NRAI) has clearly stated that the levying of service charge is entirely legal, and it's the individual restaurant's discretion not to charge it. 

"Information regarding the amount of Service Charge is 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," NRAI says. 

The amount of service tax is mentioned in the menu, and when the customer affirms his order, a bonafide agreement is created, and under it, a service charge is levied. 

NRAI further clarified that a significant part of the service charge is distributed among the workers, and leftover money is kept as a 'cushion' to fall back upon, keeping in mind the uncertain nature of the hospitality industry. 

The bottom line

A customer has an option not to pay a service charge. A restaurant cannot restrict entry by imposing payment of service charges. Furthermore, the restaurant has to inform the customer that the service charge is entirely voluntary and at the customer's discretion. 


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