Unfair Trade Practices and Protection of Consumer Interest on levy of Service Charge in Hotels & Restaurants

Ban on Service Charge in HORECA Industry

Deepesh Sharma
Deepesh Sharma

Published on: Jul 27, 2022

Updated on: Jul 27, 2022

(18 Ratings)
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Consumer Protection Act was introduced to protect the interests of consumers by establishing authority for settling Consumer Disputes. Apart from Consumer Disputes, this Act also established authority at Central Level which was named Central Consumer Protection Authority (CCPA). This authority regulates matters relating to violation of the rights of consumers, unfair trade practices, and false or misleading advertisements. CCPA has issued multiple guidelines on numerous occasions and kept transparency on trade practices followed by industries.

What is Service Charge?

A Service Charge is the fee that is collected for providing a certain service. A Service Charge is collected for different services by different industries. Service Charges are charged by HORECA (Hotel, Restaurant, and Café) Industry in lieu of tips. Few consider them as the forced tip on consumers. This “tip” becomes forceful when consumers are not aware while paying. A few examples of Service Charge are as following:

  • Airline Industry charges a fee for the cancellation of Tickets.
  • Banking Industry charges a small fee for using ATMs after crossing the monthly limit of transactions.
  • HORECA (Hotel, Restaurant, and Café) Industry charges a small fee for food delivery at room service or dining services.

Clarification on Service Charge as Unfair Trade Practice – 2016

In 2016, The Ministry of Consumer Affairs, Food & Public Distribution, Government of India wrote to the Food, Civil Supplies and Consumer Protection Department of all the State/UT Government, providing clarification on Service Charges by HORECA Industry. This clarification was provided after abundant complaints were received from consumers. The clarification on service charge was based on the following points:

  • Hotels and Restaurants are charging Service Charge ranging from 5-20% in lieu of tips.
  • The Consumers are forced to pay the Service Charge irrespective the consumer is satisfied or dissatisfied with the services rendered to him.
  • If any service hired or availed by a consumer suffers from deficiency and even then a service charge is being forced on the consumer, comes under Unfair Trade Practice as per The Consumer Protection Act.

The Hotel Association of India has also observed that Service charges are completely discretionary and the Consumer can waive it if they are dissatisfied with the service of the Restaurant or Hotel.

The Instructions issued to all State/UT governments are three folds:

  • Apprise the Companies, HORECA industry regarding the Unfair Trade Practices defined as per Consumer Protection Act, 1986.
  • HORECA industry to spread the awareness on Service Charges being discretionary by displaying them appropriately in their premises.
  • Issue instructions to all the retail outlets for issuing a bill to consumers for the purchases made by them.

Guidelines on Fair Trade Practice on Service Charge – 2017

The Ministry of Consumer Affairs, Food & Public Distribution, Government of India, issued guidelines listing out the Fair-Trade Practice on Service Charge. These guidelines were issued after receiving ample issues and complaints from consumers. Leading on to the clarification issued in the year 2016, the following guidelines were released:

  • Keeping in mind how important the service is for Food and Beverage industry, the price of the product served is expected to cover the price of the service as well.
  • The consumer shall be made aware of every charge and appropriate tax for the product, for which they place an order. Charging the consumer for any other service or product would fall under Unfair Trade Practice.
  • Tip or Gratuity paid towards hospitality by a customer is a separate transaction between the staff of the Hotel/Restaurant and the customer. This cannot be forced and is always at the pleasure of the customer.
  • Obligating the Customer to pay a service charge just for entering the premises would be termed as Unfair Trade Practice.

Guidelines to Prevent Unfair Trade Practice and Protection of Consumer – 2022

While the earlier guidelines issued by CCPA had defined the fair and unfair trade practices towards a service charge applied by HORECA industry. In July 2022, the CCPA took an action after receiving multiple complaints from Consumers being forced to pay service charges. The guidelines for HORECA are as following:

  • Service charges cannot be added automatically or by default in the Bill by Hotels or Restaurants.
  • Service Charges shall not be collected from consumers by any other name as well.
  • Consumer shall not be forced to pay service charges and they shall be made aware by Hotel or Restaurant that Service Charge is voluntary, optional, and at the consumer’s option.
  • Consumer shall not be compelled to pay services charges on entry or provision of services.
  • Service Charges shall not be collected by adding it along with the food bill and levying GST on the total amount.

HORECA industry just came out from its worst phase during Covid-19 lockdowns and it has still not recovered from its huge losses. The application of service charges in bills was providing them a small cash input and with CCPA cracking down on service charges and considering it an Unfair Trade Practice has stopped this sweet money flow. The world has moved from Covid-19 and trying to heal itself, while the HORECA industry is still looking for a little hope to achieve its previous profitable position. While the World Bank’s Global Economic Prospects have predicted a recession in 2023-24, which is just around the corner, the future of HORECA industry still lurches in the dark.

Update: Delhi High Court has granted a Stay Order on recent guidelines and has asked the HORECA association to ensure that levy of service charge in addition and the obligation of customers to pay the same is duly and prominently displayed on the menu or other place where it may be deemed to be expedient.

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