Nothing justifies restaurant service charges; law to end it is right

In the US and some other jurisdictions, it is common for restaurants to announce on their menu cards that service charge of say 10% of the food bill would have to be payable in addition. And that such service charge goes to restaurant staff as gratuity.

Implicit in this disclaimer is the purported dignified message that it is not an act of self-aggrandizement on the part of the restaurant. On the contrary, it is altruism at work. Concern for the workers. Touché!

Yours sincerely has often joined issues with his son on this score during his US visits. He generously pays the service charge included in the bill, further increased with a flourish of pen towards an even more generous tip to the waiter. When I protest at this gushing and unwarranted munificence, he chides me as being heartless! At times the reprimand assumes a withering look. Indians working in the US remember their student days there with a touch of nostalgia and hence empathise with waiters and stewards.

Service charges resented

Back home in India, while diners in a mood of supreme contentment generously tip the waiter with cash, letting out a delicious burp even while paying the restaurant with credit card, they resent service charges slapped on them by restaurants.

The Department of Consumer Affairs in April 2017 heeded their grievance and issued guidelines saying such service charges should be stated upfront to be both optional and voluntary. As is widely known, guidelines do not have the force of law and predictably restaurants have been, by and large, smirking at it. The last straw on the camel’s back was the insults heaped on demurring diners by the restaurant owners and their staff with snide remarks.

The government, therefore, called a meeting of all the stakeholders on June 2, 2022, and read out the riot act to the recalcitrant restaurants — your avarice would be tamed with legislation. One can soon expect an amendment to the Consumer Protection Act to make compulsory levy of service charges by restaurants an unfair or restrictive trade practice.

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The National Restaurant Association of India has predictably reacted angrily at the move. It has reiterated its by-now familiar argument, laced with a touch of feigned altruism — after all we don’t pocket the service charges but pass them on to the staff. Cynics wonder whether restaurants, many of whom do not pass on the service tax collected from the diners to the government, would take the trouble of passing on the service charges to the staff, many of whom work on starvation wages. Be that as it may.

The debate on whether a restaurant is a seller of goods or a provider of services is as old as the hills. The GST law has mercifully settled the issue as, innately, the law doesn’t quibble between the two.  A total of 5% is the service tax on restaurant bills, period, without hairsplitting on whether, and to what extent, the consumer is paying for goods or services. As the 2017 guidelines rightly point out, service tax (now GST) is paid by all willy-nilly, but service charges stick out as a sore thumb. To their minds, it is just plain duplication.

Transparency in price rise

The duplication, however, can be understood at a more rational level. The guidelines rightly point out that if a restaurant feels its service expenses are not fully captured by the menu price, it can by all means transparently increase the menu price. It is then for the diner to take a call on whether to patronise the restaurant or to go to the one that offers the same fare at a more reasonable price.

The advent of food aggregators has queered the pitch further.  It is reported that the Zomatos and Swiggys of the world channel 26% of the bill towards their service charges to the restaurants, and pay the restaurants only the balance. So, will the real service provider please stand up? In a way it is a poetic justice — restaurants’ avarice matched by the food aggregators’!

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The truth is all service providers, be they hospitals or airlines or restaurants, are itching to squeeze more out of their patrons. Service charges come handy.  Airlines charge for boarding passes separately and for booking tickets online separately. Hospitals charge separately for doctors and nurses and ward boys.

They all forget that none of them operate in a milieu of cost-plus pricing but in an ecosystem where their prices are supposed to capture all costs and leave a decent profit for the owners which no one resents. What one resents is the sleight of hand practised in the form of surreptitious add-ons like service charges.

The government would do well to amend the law comprehensively and not piecemeal. Restaurants are not the only ones showing avaricious proclivity.

(The writer is a CA by qualification, and writes on business, consumer issues and fiscal laws.)

(The Federal seeks to present views and opinions from all sides of the spectrum. The information, ideas or opinions in the articles are of the author and do not necessarily reflect the views of The Federal)