Nothing justifies the restaurant’s service charge; law to end it is just
If a restaurant feels that their service expenses are not fully accounted for by the price of the menu, they can by all means increase the price of the menu transparently.
In the United States and some other jurisdictions, it is common for restaurants to advertise on their menu cards that a service charge of, say, 10% of the food bill will have to be paid on top. And that this service charge goes to the restaurant staff as a tip.
Implicit in this disclaimer is the supposed dignified message that this 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. Hit !
Your sincere has often joined the issues with his son over this when he visits the United States. He generously pays the service charge included in the bill, further increased with the stroke of a pen towards an even more generous tip to the waiter. When I protest against this gushing and unjustified munificence, he reproaches me for being heartless! Sometimes the reprimand takes on a withered air. Indians working in the United States remember their student years there with a touch of nostalgia and therefore sympathize with the waiters and stewards.
Misperceived service charges
Back home in India, as diners in a mood of supreme satisfaction generously tip the waiter in cash, letting out a delicious burp even when paying the restaurant with a credit card, they resent the expense of service imposed by restaurants.
In April 2017, the Department of Consumer Affairs heeded their grievance and issued guidelines stating that such service charges should be declared in advance as both optional and voluntary. As is well known, the guidelines do not have the force of law and, unsurprisingly, restaurants have, on the whole, smiled on them. The last straw on the camel’s back was the insults heaped on reluctant diners by restaurateurs and their staff with sarcastic remarks.
So the government called a meeting of all stakeholders on June 2, 2022 and read the riot law to the recalcitrant restaurants – your greed would be tamed by the legislation. An amendment to the Consumer Protection Act can be expected to make the mandatory collection of service charges by restaurants an unfair or restrictive business practice.
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The National Restaurant Association of India predictably reacted angrily to the decision. He reiterated his now familiar argument, with a touch of feigned altruism — after all, we don’t pocket the service fee, but we pass it on to the staff. Cynics wonder whether restaurants, many of whom don’t pass on the service charge levied on diners to the government, would bother to pass the service charge on to staff, many of whom work on starvation wages. Whatever.
The debate over whether a restaurant is a seller of goods or a provider of services is as old as the hills. The GST law has fortunately settled the question because, of course, the law does not hesitate between the two. A total of 5% is service tax on restaurant bills, period, regardless of whether and how much 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 the service charge sticks out like a sore thumb. For them, it is simply a duplication.
Transparency in price increases
Duplication, however, can be understood on a more rational level. The guidelines correctly point out that if a restaurant feels that its service expenses are not fully reflected in the menu price, it can by any means transparently increase the menu price. It is then up to the guest to decide whether to frequent the restaurant or go to someone who offers the same price at a more reasonable price.
The advent of feed aggregators has made the terrain even stranger. Zomatos and Swiggys around the world are reported to channel 26% of the bill into their restaurant service charges and only pay restaurants the balance. So, will the real service provider rise? It’s sort of poetic justice — the greed of restaurants matched by that of food aggregators!
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The truth is that all service providers, whether hospitals, airlines or restaurants, are eager to get the most out of their customers. The service charge is convenient. Airlines charge boarding passes and online ticket reservations separately. Hospitals bill doctors, nurses and ward boys separately.
They all forget that none of them operate in a cost-plus pricing environment, but in an ecosystem where their pricing is supposed to capture all costs and leave a decent profit for owners, which no one is outraged about . What we hate is the sleight of hand in the form of surreptitious add-ons like service charges.
The government would do well to change the law comprehensively and not piecemeal. Restaurants aren’t the only ones showing a propensity for greed.
(The author is CA qualified and writes on business, consumer issues and tax laws.)
(The Fed seeks to present views and opinions from all sides of the spectrum. The information, ideas or opinions contained in the articles are of the author and do not necessarily reflect the views of the Fed)