No service charge = Expensive resto outing?

After the recent Delhi High Court ruling that service charges can’t be mandatory on food bills, restaurants are oscillating between increasing food and drink prices and letting the restaurant staff bear the loss. Justice Prathiba M Singh said that for consumers, the collection of service charges is proving to be a double whammy – they are forced to pay service tax and GST on the service charge as well. Industry experts say that the ruling will leave restos to reassess their pricing, affecting not only businesses but also consumers. Should diners be ready to deal with a high-priced menu? Industry experts say, “Not immediately, but eventually.”

Collecting service charge on a mandatory basis is contrary to consumer interest: Court
Justice Prathiba M Singh said that for the consumers, the collection of service charge is proving to be a double whammy they are forced to pay service tax and GST on the service charge as well. And that this position cannot be ignored by the Court. She imposed costs of ₹1 lakh on the restaurant associations that challenged the CCPA guideline. The court stated, “Service charge or tip as it is colloquially referred, is a voluntary payment by the customer. It cannot be compulsory or mandatory. The practice undertaken by the restaurant establishments of collecting service charge that too on a mandatory basis, in a coercive manner, would be contrary to consumer interest and is violative of consumer rights.”
The service charge battle
2017: The Department of Consumer Affairs (DoCA) issued guidelines stating that charging anything beyond menu price inclusive of all taxes without consumer’s consent was unfair trade practice
June 2022: Food and Consumer Affairs Minister Piyush Goyal said that restaurants cannot add ‘service charge’ to the food bills, though customers at their discretion can give “tips”
July 2022: The Central Consumer Protection Authority (CCPA) issued new guidelines prohibiting hotels and restos from automatically adding service charges to food bills
July, 2022: The National Restaurant Association of India (NRAI) and the Federation of Hotels and Restaurant Associations of India (FHRAI) challenged the CCPA’s guidelines The plea by NRAI contended that there is no law which disallows restaurants from levying service charge and there has been no amendment to the existing laws which would render levy of the service charge illegal.

‘The immediate impact will be a sudden drop in pay’
Restaurateurs say that service charges allow them to pay not just their servers but the entire staff. “Even if customers leave a tip, those tips are not guaranteed to reach all staff members as they used to with the service charge. For restaurant staff, income from service charges was a part of their salary. Now that income will decrease. The immediate impact is a sudden drop in pay, the long-term effect could lead to an exodus of expertise and skilled workers,” says a restaurateurs.
Rohit Malhotra, CEO of Playboy India Venues, says that the ruling will affect wages. He says, “The Delhi High Court’s ban on automatic service charges disrupts industry norms, much like removing fuel surcharges in airlines or handling fees in e-commerce. Service charges ensure fair wages for hospitality workers, just as delivery fees support logistics staff and convenience fees sustain digital payment platforms. Instead of banning, regulations should ensure transparency and fair distribution, preserving an essential system that sustains businesses and workers alike.”

Why restos add a service charge instead of increasing menu prices
Restos impose a service charge instead of menu prices, because guests don’t want to pay more for food. “The reason restaurants hesitate to incorporate service charges by raising menu prices is that it directly affects customers, and we didn’t want to switch to that model. Diners often prefer restaurants where they feel they are getting a better deal,” explains a restaurateur.

We are left with few alternatives - either restaurant staff bear the loss, or prices increase: Riyaaz Amlani, MD and Founder of Impresario Entertainment & Hospitality Pvt Ltd

“With the recent developments in service charge regulations, the ones most affected are the people who serve our guests every day. Service charge directly benefits our staff, ensuring fair earnings for their hard work. Without it, we are left with few alternatives - either restaurant staff bear the loss, or prices increase, directly affecting customers. This change doesn’t just impact restaurants; it impacts the entire hospitality ecosystem as it directly affects the interests of both our guests and the people who serve them."

What does CCPA guidelines say
• Hotels or restaurant shall not add service charge automatically or by default in the food bill;
• No collection of service charge shall be done by any other
name;
• No hotel or restaurant shall force a consumer to pay service charge and shall clearly inform the consumer that service charge is voluntary, optional and at consumer's discretion;
• No restriction on entry or provision of services based on collection of service charge shall be imposed on
consumers; and
• Service charge shall not be collected by adding it along with the food bill and levying GST on the total amount.

How is the 2022 guideline of Central Consumer Protection Authority different from 2017 guidelines of the Department of Consumer Affairs
-The guidelines issued in 2017, were advisory.
-It allowed restaurants to print service charge in bills but it was left to customers to decide whether they wanted to pay or not.
- However, as per CCPA 2022 guidelines restaurants and hotels were not allowed to directly or indirectly levy any service charge or any other charge other than food items.
- After CCPA 2022 guidelines now people can seek redressal and contact CCPA. The earlier Consumer Protection Act had no provision for CCPA, which is now a nodal authority to address consumers’ concerns.