Analyzing the Growing Dilemma of Paying Service Charge at Restaurants

Introduction

An unsavoury row over service charge has led to a ban on restaurants and hotels from adding a service charge to bills. Over the last few years, restaurants had started to automatically add a service charge of 5-15 per cent to the bill. This led to an increase in number of complaints from consumers.

The order from the Central Consumer Protection Authority came after it said there had been an increase in complaints from customers. The CCPA issued five major guidelines regarding the levying of service charge in bills by hotels and restaurants. This did not go down well with the NRAI and FHRAI. Thus, this issue has now been turned into a legal battle between the authorities.

Time and again, the definition, legality and validity of ‘mandatory’ service charge on restaurant/hotel bills have been debated by both consumers and hotels and restaurants. The service charge rule has create confusion between consumers and the restaurateurs and hoteliers. The question that arises in everyone’s mind is that whether to pay or not to pay service charge at hotels and restaurants?

What is Service Charge?

A service charge, also known as service fee, refers to a fee collected to pay for services in relation to a product or service that is being purchased by customers. In simpler words, a service charge is an additional charge or fee for the service provided to customers with the purchase of any product or service. For example, a service charge is typically added to the bill of a customer who expects services in a restaurant or hotel.

Depending on the industry concerned, service charges are referred by different names. Service charges are typically collected when there is a certain type of interaction between a customer and a company involved. Such as, for banking industry, maintenance fees is collected every month. On the other hand, for travel and hotels, security fees and booking fees are collected, respectively.

In India, Central Consumer Protection Authority released guidelines in 2017 which directed hotels and restaurants to print service charges in bills. However, it was left to customers discretion whether they wanted to pay the service charge or not. In 2022, Central Consumer Protection Authority released a new set of guidelines that bans hotels and restaurants from adding service charges to bills. However, considering the plea of hoteliers and restaurateurs, the Delhi High Court has put a stay on the guidelines issued by CCPA.

Time and again, the definition, legality and validity of ‘mandatory’ service charge on restaurant/hotel bills have been debated by both consumers and hotels and restaurants. This article aims to explain the Service Charge Rule in detail and create awareness among consumers about the new guidelines issued by CCPA and the HC’s stay on these guidelines.

What CCPA Guidelines on Service Charge Say?

Central Consumer Protection Authority, introduced in the Consumer Protection Act, 2019, was established in 2020 which aims to protect the customer from unfair trade practices, and false and misleading advertisements. CCPA was formed under Section 10(1) of The Consumer Protection Act, 2019.

On July 4, 2022, The Ministry of Consumer Affairs, Food & Public Distribution issued guidelines by the Central Consumer Protection Authority (CCPA) for preventing unfair trade practices and to protect the customers from the levy of service charges in hotels and restaurants.

The CCPA has issued five major guidelines regarding the levying of service charge in bills by hotels and restaurants. These guidelines came after long-standing issues and continuous complaints from consumers regarding the levying of service charge in bills.

The CCPA issued guidelines specifies that no service charges can be added to the bill, automatically or by default, by hotels and restaurants. It clarifies:

  • Service charge cannot be collected in any other form or by any other name.
  • Consumer cannot be forced by any hotel or restaurant to pay the service charge. It also the duty of the hotel or restaurant to clearly inform the consumer that service charge is optional, voluntary and at the consumer’s discretion. 
  • Consumers entry or provision of services cannot be restricted by any hotel or restaurant solely on the collection of service charge. 
  • The service charge shall not be collected by adding it along with the food bill and levying GST on the total amount.

The CCPA has also issued guidelines for consumers, in case, hotels and restaurants are still forcing them to pay service charges. The four ways through which a consumer can opt for dispute redressal methods are:

  • The consumer can ask/request the hotel or restaurant to remove the service charge from his/her bill.
  • The consumer can also lodge a complaint on the National Consumer Helpline (NCH) number, which is, 1915.
  • The consumer also has a provision to lodge his/her complain to the Consumer Commission, or through the edaakhil portal, http://www.edaakhil.nic.in.
  • The consumer can also lodge his/her complaint to the District Collector of the concerned district.

CCPA has issued these guidelines related to the levying of service charges under Section 18 (2) (I) of The Consumer Protection Act, 2019.

How are the Latest Guidelines Different from the 2017 One?

The issue related to levying of service charges by hotels and restaurants was first raised in the year 2017. Back then, an advisory allowed hotels and restaurants to print service charges in bills. However, it was left to customers discretion whether they wanted to pay the service charge or not.

Though CCPA had issued guidelines for the consumers benefit, many hotels and restaurants were still not following these guidelines. Ultimately, to resolve this issue and prohibit the levy of service charge on consumers by hotels and restaurants, the CCPA issued an addition to the 2017’s guidelines. According to the new guidelines, no service charges can be added to the bill, automatically or by default, by hotels and restaurants.

Another addition to the new guidelines are that consumers can now seek redressal, in case, hotels and restaurants are still forcing them to pay service charges.

How the New Service Charge Guidelines impact Customers?

The new service charge guidelines has sparked joy among bill paying consumers. Consumers are happy that they will no longer be forced to pay service charge in hotels or restaurants. Further, CCPA’s dispute redressal methods will help and protect consumers from forceful paying of service charge.

Although, CCPA has issued new guidelines to protect consumers, they are still not sure if the hotels and restaurants will follow these guidelines. Also, many consumers are worried that they will be charged extra, either in the form of GST or by increasing the prices of food items.

How the New Service Charge Guidelines impact Restaurateurs and Hoteliers?

While the Central Consumer Protection Authority’s (CCPA) new guidelines has sparked joy among bill paying consumers, the same is not the case for those who own and run hotels and restaurants. According to the owners of hotels and restaurants, levying of service charge by a restaurant or hotel is a “matter of individual policy”. According to them, there is “no illegality in levying such a charge”.

Most of the restaurant owners have said that these new guidelines will harm the industry. For them, these guidelines are unfortunate and will hurt the sentiments of not just the work staff and hospitality industry, but also the customers. According to restaurant owners, these new guidelines will result in the loss of remuneration for their staff. Consider that this is just a guide-line, many restaurant owners have requested the government to reconsider their decision on this matter.

The National Restaurant Association of India (NRAI), issued a statement saying that “The latest guideline issued by CCPA has once again created unnecessary confusion among consumers… Extra charges are levied by various other industries, including some government agencies, however, the guidelines are issued only for the restaurant industry.”

Joint Hon. Secretary of the Federation of Hotel & Restaurant Associations of India (FHRAI), Pradeep Shetty said that these guidelines issued by CCPA are just guidelines and not a new law. He stated, “These are a new set of guidelines that have been issued by CCPA and not a new law. Most of these guidelines have already been followed by hotels and restaurants. Nobody was forced to pay the service charge nor was any consumer turned back if they disagreed to pay it.” 

Gurbaxish Singh Kohli, Vice President, Federation of Hotel & Restaurant Associations of India (FHRAI) said that “We are an industry that creates jobs and at the end of the day, any kind of ruling or order against the service charge will be detrimental to employees since they are the ones who will suffer.”

NRAI and FHRAI Challenges CCPA’s Guidelines Banning Service Charges

National Restaurant Association of India (NRAI), which has approximately 7,000 restaurant outlets, all over India and about 2,500 member outlets in Delhi NCR, stated that the levy of service charge in bills by restaurants and hotels has been a longstanding practice in the hospitality industry for more than 80 years.

The National Restaurant Association of India (NRAI) and the Federation of Hotel & Restaurant Associations of India (FHRAI) moved the Delhi High Court challenging CCPA’s new guidelines banning service charges collected by hotels or restaurants and the notification of July 6 where the CCPA had directed district collectors of all states and Union Territories to enforce the rule.

NRAI, in its petition filed through advocate Nina Gupta, said, “The wide publicity of the issue regarding service charge has led to a fear psychosis among the restaurant owners and has created a wrong impression in the minds of the public. This has adversely affected the smooth functioning and business of the restaurants.”

According to the NRAI and FHRAI, the central government cannot bring about a change as CCPA guidelines are a mere guide-line to the hospitality industry, and not any law.

‘Don’t Enter, Don’t Pay’: Delhi HC Stays Guidelines Banning Service Charges

The Delhi High Court has put a stay on the CCPA’s July 4 guidelines banning service charges while hearing a plea filed by NRAI and FHRAI challenging the authority of the said guidelines.

The National Restaurant Association of India (NRAI) and the Federation of Hotel & Restaurant Associations of India (FHRAI) moved the Delhi High Court challenging CCPA’s new guidelines banning service charges collected by hotels or restaurants and the notification of July 6 where the CCPA had directed district collectors of all states and Union Territories to enforce the rule.

Senior Advocate, Sumeet Sethi, appearing for the FHRAI, contended that CCPA had no authority to issue guidelines banning service charges. “If I add the service charge to the price of the article sold then the price of the food will increase. They are fine with me increasing the price but that will also affect the consumer who is ordering from home. Service charges only apply to customers who come to the restaurant because is it for the service given by the waiter and back end staff,” he contended.

Senior Advocate, Lalit Bhasin, appearing on behalf of the NRAI, contended that collection of service charges have been allowed since 1970s. The Counsel, appearing on behalf of the CCPA, contended that asking customers to pay service charges comes under the purview of “unfair trade practices”. “We have received 535 complaints that restaurants are asking consumers not to enter if they don’t want to pay,” the lawyer informed the court.

The single bench comprising of Justice Yashwant Verma while dealing with the plea filed by NRAI and FHRAI challenging CCPA’s new guidelines banning service charges collected by hotels or restaurants, said that this issue requires consideration.

In his order, he said that “If you don’t want to pay, don’t enter the restaurant. It is ultimately a question of choice. I have stayed the para 7 guidelines subject to these two conditions.” He further stated in his order that, “On a more fundamental claim, the court notes that there would be serious doubts as to whether service charges would fall within the ambit of the consumer protection act, particularly in light of the NCDRC order where the commission had upheld service charges.”

Ultimately, the court decided to issue notices to the Centre, the Ministry of Consumer Affairs and the CCPA to reply to the plea filed by NRAI and FHRAI. The court also issued an interim stay on the CCPA’s July 4 guidelines banning the service charges, till the next date of hearing.

The bench also laid down conditions ordering the restaurants and hotels to clearly mention the levy of service charges in the bill, and also ordered them to not add any service charge on takeaways/deliveries.

The case will be further heard on November 25, 2022, now.

CCPA Challenges Delhi HC’s Stay on Guidelines Banning Service Charges

The Central Consumer Protection Authority (CCPA) further challenged the Delhi High Court’s decision to a division bench of the court. The Delhi High Court’s order had put a stay on the recent guidelines issued by the government, restraining the levy of service charge on food bills by restaurants and hotels.

On August 16, the division bench headed by Chief Justice of Delhi Satish Chandra Sharma and Justice Subramonium Prasad heard the appeal filed by the CCPA and granted liberty to CCPA to file its response before the single bench.

ASG Chetan Sharma, appearing on behalf of the appellant, told the court that 1000 complaints have been received from the consumers regarding levying of service charges since the single judge’s order on July 20.“They can price their food at any rate, but it is being felt by customers that this service charge is levied by the government and they feel embarrassed if they don’t pay it,” he said.

Senior Advocate, appearing on behalf of the NRAI and FHRAI, stated that the hospitality industry has been levying service charge on bills from the past 70 years. “Heavens are not going to fall if this is allowed to continue for the next few weeks, when this has been going on for the last 70 years,” he said.

The matter will now be heard by the single bench judge of the Delhi High Court on 30th August, 2022.

To Pay or Not to Pay Service Charge at Restaurants and Hotels?

Time and again, the definition, legality and validity of ‘mandatory’ service charge on restaurant/hotel bills have been debated by both consumers and hotels and restaurants. The service charge rule has create confusion between consumers and the restaurateurs and hoteliers. The question that arises in everyone’s mind is that whether to pay or not to pay service charge at hotels and restaurants?

“Delhi High Court has stayed only para 7 of the July 4, 2022 CCPA Guidelines. Therefore legal position considering aforesaid guidelines read with guidelines dated April 21, 2017 published by the Department of Consumer Affairs, is still the same that service charge cannot be added in the bill involuntarily, without allowing consumers the choice or discretion to decide whether they want to pay such charge or not,” said Harvinder Singh, Partner at DSK Legal.

The Delhi High Court has only put a stay on the para 7 of the July 4 CCPA guidelines. Thus, according to the rights of the consumer as stated in Rule 9 of the guidelines, a consumer can still make a request to remove the service charge and file a complaint with CCPA, if any restaurant or hotel forces them to pay the service charge. Though, the High Court’s order has also allowed restaurants and hotels to levy service charges in the bill.

Conclusion

The debate is over the legality of service charges being levied by the restaurants and hotels while the CCPA tries to control the “unfair trade practices” being followed by the hospitality industry from the past 70 years. The CCPA wishes to create a robust framework to ensure strict compliance by the stakeholders and, to protect the consumers from such unfair trade practices.

While the debate over the legality of service charges levied by the restaurants and hotels goes on, some netizens call it a ‘sneaky practice’ while others call it as‘ridiculous’. Consumers feel that service charge is collected by hotels and restaurants claiming that the service charge goes to the staff, but in reality, this is not being followed by the hotels and restaurants. 80% of consumers are dissatisfied and unhappy with the high court’s decision.

On the other hand, the stay by the court has brought a sense of relief for the hospitality industry. For them, the practice of collecting service charge is being followed from the last 70 years and, this practise should never be stopped as this help the minimum wage workers to earn extra money.

In all this, however, it is important to consider the consumers’ issues. Service charge should only be applied voluntarily and, at the discretion of the customer. Also, it is important for the restaurants and hotels to clearly inform the consumer of such charges being added to their bills.

This article aimed to explain the Service Charge Rule in detail and create awareness among consumers about the new guidelines issued by CCPA and the HC’s stay on these guidelines.

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