February 2017

Service Charge: A Matter of Customers’ Discretion or Obtrusiveness

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In a recent order by the Central Government, customers have been given the discretionary power to decide whether they feel like paying service charge or find it unjustifiable based on their personal experience in any restaurant or hotel. Such a directive influencing general public and eateries must be explored, writes Elets News Network (ENN).

At the advent of 2017, Prime Minister Narendra Modi-led government announced service charges billed by restaurants are optional and it is up to the customers’ choice to pay it or not.

The decision was taken by the Department of Consumer Affairs citing the complaints that hotels and restaurants are levying an additional 5 to 20% in bills in lieu of tips, regardless of the kind of service provided.

To make public aware about the decision, the department has asked the State governments to order hotels and restaurants and advise for displaying the service charges at appropriate places on their premises or in menu.

As per the order, service charges are discretionary/ voluntary and these can be waived off in case a consumer feels dissatisfied with the services.

What Does Indian Law say?
Service Charge is totally different from “Service Tax” and not imposed or collected by the government. In lieu of services, offered by restaurants or by hotels, service charges are collected by them.

In many restaurants, consumers are forced to pay additional “service charge” ranging from 5-20%, irrespective of the kind of services provided to them. Since this is not a government tax or charge, restaurants’ charging of service charges is not an offence under the Finance Act, 1994. Hence the government cannot take any proactive action against hotels.

According to the Consumer Protection Act, 1986, in case of unfair method or deceptive practice adopted by any business organisations for the purpose of promoting the sale, use, or the supply of any goods, or for the provision of any service, consumer forum must treat it as an unfair trade practice.

In the same context, the Act further adds that consumers are free to make a complaint to the appropriate consumer forum against any such unfair trade practices. In other words, dissatisfied consumers can approach the relevant consumer forum for redressal of the deficiency in service.

According to a government’s statement, Ministry of Consumer Affairs, Food and Public Distribution sought a clarification from the Hotel Association of India in this regard. In its reply to the ministry, the association stated that the service charge was completely discretionary, and a customer dissatisfied with the dining experience could waive it off. Therefore, the government could deem that its suggestion has been accepted voluntarily.

Reaction from Restaurants/Hotels:
Soon after the announcement regarding service charge by the government, an instant reaction was made by National Restaurant Association of India (NRAI). The body said, “It is a matter of policy for a restaurant to decide if service charge is to be levied or not”. NRAI further stated that service charge being levied must be clearly mentioned in the menu or displayed, so that it is a consumer’s choice to eat there or not.

A well-known restauranteur, opines instead of looking at service charge, the government should be reducing the taxes charged, which the diner has to pay mandatorily. A growing industry like Food and Beverage needs government support in order to deal with high cost escalations and a highly competitive market. In all fairness, it seems incorrect to force a customer to tip, regardless of the dining experience.

Many restaurants already charge high prices for each dish, which a customer is ready to pay keeping in mind the location, the brand, the service levels and the overheads of the establishment. However, to be charged another 10% or so, to keep the staff happy seems to be something consumers are not comfortable with and feel that this should be the prerogative of the restaurant owners and managers.

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