APRIL 02, 2025

By Vijay Kumar

- HOTELS or restaurants 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.

- Service charge shall not be collected by adding it along with the food bill and levying GST on the total amount.

These guidelines were issued on 4th July 2022 by the Ministry of Consumer Affairs, Food and Public Distribution and were promptly challenged by the National Restaurant Association of India and Federation of Hotel and Restaurant Associations of India in the Delhi High Court. The High Court gave its verdict last week - 2025-TIOL-495-HC-DEL-ST

Ever stared at a restaurant bill like you're deciphering hieroglyphs? There's the food, GST, and the mysterious "service charge" staring back at you-begging the question, are you tipping the waiter or funding their retirement plan?

Look at a Sample Bill of a Restaurant

Many complaints were received from consumers regarding forcible collection of service charge.

1. Some customers were confused with service charge and GST levied by the Government; there were instances where the owners of restaurants had stated that service charge is a government rule.

2. There were also instances where service charge was forced to be paid by the customers using brute force, threats, etc. In some cases, upon the customers refusing to pay the service charge, bouncers were called, and threats were issued to pay the entire bill.

3. Complaints of some restaurants putting wrong GST numbers in the bill to avoid being traced were also made.

4. Consumers were also told that service charge does not depend upon the quality of service provided and it is a mandatory payment.

5. Some consumers complained that service charge of 13% is being collected over and above the GST.

6. There were also examples of bills not giving the full expansion of the word 'Service Charge' and using the abbreviation such as 'VSC' for voluntary service charge, 'SC' for service charge, 'SER', 'CHGS', 'S. CHARGE', 'SRVCGH', etc.

7. The bills were also generated on dot matrix printers and the printout of the bill was barely readable.

Many of us must have faced these issues quite often but must have silently swallowed the restaurant service.

On 05.02.2019, the Minister of State for Consumer Affairs, Food and Public Distribution Shri C.R. Chaudhary answered the following questions in the Lok Sabha:

Questions:

a) whether it has come to the notice of the Government that despite Goods and Services Tax (GST), service tax is still charged by many businessmen, especially in restaurants;

b) If so, the details thereof and the provision of law relating thereto;

c) Whether the Government has any proposal for addressing customers' grievances on service charges; and

d) The concrete measures taken or proposed to be taken by the Government in this regard?

Answers:

(a) to (d): Charging of Service Tax is not valid. The Government in April 2017 issued guidelines on fair trade practices related to charging of Service Charge from consumer by hotel/restaurants. As per these guidelines, Service Charge is optional and payment of it depends entirely upon the discretion of the consumers. An aggrieved consumer can approach a consumer forum of appropriate jurisdiction for redressal of his grievance related to charging of service charges by hotels and restaurants.

The High Court perceived these problems in the collection of service charge:

1. The nomenclature itself i.e., service charge, especially after the introduction of service tax, is confusing, deceiving and misleading in nature;

2. In the various bills of restaurants, the charges are not comprehensible as different abbreviated versions such as 'VSC', 'SER', 'SER CHGS', 'S. CHARGE', 'SRVCGH', etc. are being used which results in confusion to the customers that the same may be a charge levied by the Government;

3. The said nomenclature is also not being made visible in the bills generated by the establishments;

4. Moreover, it is noticed that the service charge is added right below the total amount of the cost of the food, followed by GST and taxes. For any consumer who does not examine the bill thoroughly, the impression given is that the service charge is a component of tax;

5. The service charge which ought to be in the form of a tip or a gratuity to the staff after enjoying satisfactory services, has now been adapted and converted into some sort of levy.

6. Private establishments do not have the power to impose such levies or even collect such levies.

7. A compulsory mandatory levy is a sovereign function.

The High Court observed that there is no uniformity in the percentage of service charge collected. The manner of enforcement of payment of service charge is also coercive in nature. In some cases, service charge is being confused with service tax or a mandatory tax imposed by the government. In fact, for the consumers, the collection of service charge is proving to be a double whammy i.e., they are forced to pay service tax and GST on the service charge as well.

The High Court was not convinced with the submission of the Petitioners that service charge is used in some way for benefit of staff as it is a feeble argument to say the least. There is no evidence provided to show that the amount collected by way of service charge is in some way benefitting the staff. Even if it were so, it is only such amount which is voluntarily paid by customers that can be utilised for the welfare of the staff. Mandatory collections which are detrimental to customers cannot be justified on the basis of some hidden benefit to staff of the establishments. A mere argument that the same is for staff welfare would not be sufficient to satisfy the Court when no documents are forthcoming in this regard.

As has been held in a catena of judgments, compulsory mandatory levy is a sovereign function. In Noida Toll Bridge Company Ltd. v. Federation of Noida Residents Welfare Associations, the Supreme Court re-emphasized that the power to 'levy' a tax or fee cannot be inferred by implication but must be expressly conferred by a statute. The Supreme Court in this judgement expressly determined that no private entity can be granted the authority to levy taxes or fees, for such powers are exclusively vested in public authorities.

It should be noted that there are a large number of establishments which do not collect service charge.

The High Court found the illegality in the collection of service charge threefold:

(i) That it is mandatory and compulsory to pay an extra amount for service given by the restaurant and the same cannot be waived off even at the request of the consumer, who may be dissatisfied by the service.

(ii) The nomenclature associated with respect to collecting the charge i.e. 'levy' and 'service charge' is misleading the consumers; the terminology used by the restaurant establishments to collect the same misleads the consumers into believing that it is some kind of a tax or levy by the State.

(iii) Further, the same is not transparently being made visible to the consumers thereby affecting the consumer's right to know.

The Court concluded:

1. Service charge or TIP as 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;

2. The collection of service charge and use of different terminologies for the said charge is misleading and deceptive in nature. The same constitutes an unfair trade practice under Section 2(47) of the CPA, 2019;

3. The justification being given on behalf of the Petitioners for collection of service charge, that they are part of labour settlements and agreements with staff, is not supported by any material on record and the same is accordingly rejected;

4. The fact that service charge can be collected as it is part of a voluntary contract/agreement made by the consumer who enters the establishment and avails of the services after seeing the chargeability of service charge on the menu card is an argument which is not tenable as such a condition is onerous and constitutes an unfair contractual condition under Section 2(46) of the CPA, 2019;

5. Consumer rights cannot be subjugated to an argument that a contract is being entered into by the consumer while entering the establishment to pay service charge as the payment and collection of service charge is itself contrary to law;

6. If consumers wish to pay any voluntary Tip for services which they had enjoyed, the same would obviously not be barred. The amount, however, ought not to be added by default in the bill/invoice and should be left to the customer's discretion.

7. The CCPA may consider permitting change in the nomenclature for Service Charge which is nothing but a 'Tip or a gratuity or a voluntary contribution'. Terminology such as 'voluntary contribution', 'staff contribution', 'staff welfare fund' or similar terminology can be permitted. The use of the word 'service charge' is misleading as consumers tend to confuse the same with service tax or GST or some other tax which is imposed and collected by the government.

The writ petitions were dismissed with costs of Rs.1 lakh each to be deposited with Central Consumer Protection Authority to be utilized for consumer welfare.

Next time you go to a restaurant, do remember the service charge is optional/voluntary and not mandatory. However, if you pay service charge, you will have to pay GST on that.

Until next week

Comments/feedback welcome at vijaywrite@tiol.in or 9848111243 (WhatsApp)