Five years on government clears air on charge by hotels, restaurants-Service charge – Finance Ministry wakes up too late

In March 2010 The BLUE MOON had raked up the issue of 10 per cent ‘service charge’ levied unilaterally by several restaurants, hotels and eateries adding it to the bill and making it look like a government levy. In absence of any clear notification from the Tourism Ministry, hundreds of thousands of unaware consumers paid the charge without raising a finger. While the taxation on eating out is already high, many in the hospitality industry have made it a heavier burden by adding yet another 10% wilfully and unilaterally, ostensibly to increase their own profits.

At that time THE BLUE MOON report was trashed by the hospitality industry and the Tourism Ministry as unnecessary criticism. However, the truth has dawned on the Finance Ministry now , five years after the issue was highlighted, which has come out with a notification clarifying that the so-called ‘service charge’ is retained by the hoteliers or restaurateurs and has nothing to do with the 5.6 per cent ‘service tax’ imposed by the government.

In a press release on 14 July, the Finance Ministry has said, “Some restaurants/hotels/eateries besides charging for the food and beverages are also charging ‘service charges’ in their bills. The proceeds of the ‘service charges’ are retained by the restaurants/hotels/eateries. Some of the consumers have a misapprehension that these ‘service charges’ are being collected by the restaurant on behalf of the Government as tax. 

It is clarified that these ‘service charges’ collected by the restaurants/hotels/eateries are retained by the restaurants/hotels/eateries and are not ‘service tax’ imposed by the Government. 

It is further clarified that effective service tax rate in respect of services provided in relation to serving of food or beverage by a restaurant, eating joint or mess having the facility of air–conditioning or central air-heating in any part of the establishment is 5.6% (14% of 40%) of the total amount charged.”

With this clarification, the Finance Ministry has admitted that consumers, unaware of the difference of levied taxes and unofficial charges, are being ripped off by those levying this unilateral ‘service charge’ which is nothing but an additional profit in the already hefty bills of restaurants and hotels. On their part those levying the charge have tried to dupe the people at large by claiming that the service charge is a form of ‘mandatory tip’.

All those establishments who are levying the service charge are also making yet another killing of 1.8 per cent which goes unnoticed as the charge is added to the bill amount before taxation.

An example of billing which raises the tax and service charge component to 29.9 per cent is explicit in the photograph of a bill raised by an international fast food chain. While the bill as per menu prices totalled Rs.569, the fast food outlet added 56.89 as 10 per cent ‘service charge’ and then taxed the entire amount once with 12.5 per cent VAT and then with 5.6 per cent service tax. Clearly the 10 per cent service charge amount was also taxed raising the actual service charge amount to 11.8 per cent instead of the shown 10 per cent. The consumer paid a total of Rs.739 which calculates to 29.9 per cent taxation. Who is fooling the consumer?

The claim by several of those charging the ‘service charge’ that it is a replacement for tip is infringement of consumer rights as it does not specify the service charge. Moreover, this can be termed “forced tip” from the consumer who may or may not like the food and services of an establishment and yet is ripped off the amount.
If some players in the hospitality industry are insisting on ‘service charge,’ they must maintain transparency by making it public through a clearly visible notice that the establishment is charging ‘service charge’ and the consumer need not pay tips to the staff. However, they do not make such announcements which prove their intention of levying undue charges to increase their own profits.

The Finance Ministry must take appropriate action in this matter as the Tourism Ministry has knowingly maintained inexplicable silence on the issue. The stand of the Tourism Ministry in this matter is not beyond suspicion as it is the Ministry which takes up matters related to the hospitality industry’s taxes with the Finance Ministry.
Such ignominious silence for so many years by the Tourism Ministry on the issue raises doubts of undue favours and considerations from those fleecing the consumers.
A majority of the players in the hospitality industry have also made it a practice to make end price of their eatables vague by simply mentioning at the end of the menu “Applicable taxes extra.” By doing so they tend to project the prices of their eatables lower than the end price and tend to give an impression which is misleading. No consumer knows the applicable local taxes. In any case the end price after taxation goes up by at least 18 per cent of the price mentioned in the menu. The consumer must then pay whatever is billed to him.

A hotelier retorted blatantly when asked why the industry is not clear on the exact taxation in the menu, “We expect the consumer to have enough money in his pocket when he comes to the restaurant.” If this is the response from leading members of the hospitality industry, it evidently shows their intention of hiding the end price from a consumer and to project their product cheaper by 18 per cent to him.
A report done by THE BLUE MOON on this practice had drawn flak from the industry leaders last year, instead of correcting what can be termed as “consumer unfriendly attitude.”
It is time that the Department of Consumer Affairs, Finance Ministry and Tourism Ministry woke up from their slumber and took action to protect the rights of consumers otherwise the slogan “Jago Grahak Jago” remains hollow.
If all products selling in the market have MRP or maximum selling price inclusive of all taxes, why should the hospitality industry be spared from being transparent in their pricing. It is a matter of consumer rights to let one know before he places an order what the end price will be.