LEVYING OF SERVICE CHARGES ON BILLS IS AN UNFAIR TRADE PRACTICE

Introduction

Hotels and restaurants are some of the most popular places for people to spend their time with their loved ones. Celebrating weekends, commercial meetings, and special gatherings are some of the most common reasons for dining out. Recently, to make it more convenient for customers, the Ministry of Consumer Affairs asked hotels and restaurants to stop levying service charges on bills and allowed customers to file their grievances in case of violation. The Central Consumer Protection Authority (CCPA) said it is a direct contravention of consumer rights. The authority has issued guidelines by framing the duties of eateries and labelling the levying of service charges on bills as “Unfair Trade Practice”. The ministry also assured that it will come up with a legal framework to end this unfair trade practice through an amendment to the Consumer Protection Act, 2019.

What is a service charge?

A service charge refers to an amount of money that is added to the bills for a particular service in addition to the basic price. Hotels and Restaurants add this amount as a service charge on bills to provide some more benefits to the staff who come and serve your table. Restaurants levy 5-15% on the food bill as a service charge. Service charges are also concerned with various industries such as Banking Industry, Airline Industry, Hospitality Industry, etc. In addition to basic fees, extra charges are imposed on consumers, which are also termed service fees, and are different from service tax. Service tax is the tax that is levied by the government of India on the services rendered by restaurants, but it is borne by the customers. Service tax is one of the indirect taxes that is now subsumed in GST. While service charge is considered as more of a forced tip that a consumer pays to the staff who comes to serve the tables.

Levying a ‘Service Charge’ is illegal

Restaurants cannot force their customers to pay service charges as they will be paid only at the consumer’s will. Consumers have the right to refuse to pay service charges imposed on food bills and can demand the establishments remove them. The Ministry of Corporate Affairs barred hotels and restaurants from levying service charges automatically or by default as it adversely impacted consumers at a large level.

A meeting was scheduled with the National Restaurant Association of India (NRAI) to discuss the issues regarding service charges levied by restaurants. In a letter to the National Restaurant Association of India, written by Rohit Kumar Singh, secretary of the Department of Consumer Affairs, pointed out the issues relating to service charges that impact consumers at large on daily basis and are detrimental to consumer rights. It has been addressed that the eateries are collecting service charges from customers by default, even though the collection of any such charges is voluntary and not mandatory as per the law.  Lights are thrown on the issue that consumers are harassed by restaurants if they resist paying service charges and are erroneously misguided about the legality of such charges.

The Department of the Ministry of Consumer Affairs announced that  “Robust framework” to end this unfair practice and to ensure strict compliance with its guidelines already published on dated April 21, 2017, on charging service charges by hotels and restaurants.

CCPA guidelines to prevent “unfair trade practices”

The Central Consumer Protection Authority (CCPA), which is a regulatory authority established under Section 10 of the Consumer Protection Act 2019, has issued guidelines to prevent unfair trade practices. Recently, the Consumer Ministry Affairs took this step to protect the rights of consumers as levying service charges is a violation of consumer rights. Amid rising complaints, the CCPA has issued five major guidelines which stipulate that:

  • No hotel or restaurant can add a service charge automatically or by default to the food bill.
  • No service charge shall be collected by the restaurants by any other name.
  • Hotels and restaurants can’t force their customers to pay the service charge as it is completely voluntary and can only be paid at the consumer’s discretion.
  • No restriction on entry or provision of services based on the collection of charge shall be imposed on consumers.
  • The service charge will not be collected by adding it to the food bill and applying GST to the total amount.

The CCPA has drawn certain guidelines to protect the interest of the consumers under section 18(2)(I) of the Consumer Protection Act, 2019, which mainly aims for the consumer interest and to create a reliable and powerful method for resolving consumer issues. In the event of any such violation, consumers can approach a forum of appropriate jurisdiction.  The consumer may complain to the National Consumer Helpline (NCH), by calling 1915 or through the NCH mobile app, which works as an alternative dispute redressal mechanism at the pre-litigation level. Consumers can file a complaint electronically through the e-daakhil portal and can also be sent an e-mail to CCPA on their official website (com-ccpa@nic.in).

NRAI argument

NRAI (National Restaurant Association of India) opposed the government by saying that barring hotels and restaurants from levying service charges without any legal basis is unfair. NRAI claimed that the legality of the service charge has been considered by the Supreme Court of India, the High Court, the National Consumer Disputes Redressal Commission, the erstwhile Monopolies, and Restrictive Trade Practices Commission, and the Income Tax Appellate Tribunal and has been upheld in various judicial pronouncements. NRAI also said that the restaurant industry is getting targeted by the government with repeated guidelines, and it reeks of discrimination. It is a common practice, and the government is disrupting the smooth operations of restaurants.

Recently, the NRAI has moved the Delhi High court against the guidelines issued by the CCPA, to stop levying service charges on food bills automatically or by default (NRAI & Ors. v. Union of India & Ors.). The NRAI claimed through the petition that the guidelines issued by CCPA were “arbitrary and untenable” since they were released without consideration of the facts and circumstances. The petitioner claimed that the imposition of service charge is a matter of contract and management choice and once the client placed an order after being informed of the terms and conditions, a legally enforceable contract is created. After that until and unless a lawful contact is shown and proven to be unconscionable or unfair commercial practice, no authority can interfere with its binding nature. The petitioner also quoted the 1976 judgment of Rambagh Palace of Hotel, Jaipur v. The Rajasthan Hotel Workers’ Union, Jaipur.

Conclusion

The Central Consumer Protection Authority (CCPA) has barred hotels and restaurants from levying service charges on food bills by issuing guidelines for eateries and rights to consumers, although it is necessary to make it clearer as it is merely a guideline and not a law as per the National Restaurants Association of India (NRAI). A service charge is an optional charge and restaurants that force their customers to pay it, fall under the ambit of unfair trade practice.

Author(s) Name: Ankita Kumari (IGNOU)