Barring restaurants from levying service charge is unfair, reeks of discrimination

Source: The post is based on an article “Barring restaurants from levying service charge is unfair, reeks of discrimination” published in the Indian Express on 8^th July 2022.

Syllabus: GS 3 Indian Economy, Government Industrial Policies

Relevance: Service Charges and Issues in the Hospitality Industry

News: In recent days, the Central Consumer Protection Authority (CCPA) issued guidelines wherein it has barred hotels and restaurants from levying service charges on the food bills of the customers.

What is the service charge?

A service charge is a charge linked to the sales of the restaurant, which is independent of wages. It isn’t revenue for the restaurant since it is distributed among workers.

What are the arguments for the continuance of the service charge?

The SC (Supreme Court), HCs (High Courts), the National Consumer Disputes Redressal Commission, and the Income Tax Appellate Tribunal has upheld the legality of levying of service charge in various judicial pronouncements.

The different businesses have different pricing models.

Service Charge formalizes equitable and fair distribution among the restaurant’s workforce. Restaurants have many people working in the background that do not interact with the customer. These workers have a distinct disadvantage, from an earning perspective, in comparison to workers who interact with customers (getting tips or other incentives).

Service charge induces price transparency to the customer as well as the restaurant worker.  There are different costs for dine-in, takeaway, and delivery services for a particular restaurant. So, in addition to a baseline menu price, a uniform service charge adds transparency to the pricing system.

If the service charge is removed, the restaurants will have to increase the menu prices. Further, the restaurant owners will have to renegotiate rental contracts because of the butterfly effect. This is because, nowadays, other than the fixed rent, the restaurants also enter into “revenue share” clauses built into their lease contracts. Service charge is kept outside the mandate of shared revenues. But, if the service charge would be included in the menu, it will have to be shared, accordingly.

There has to be a robust conversation around service charges as it actually helps restaurant workers to earn their fair share and further, it also optimizes operations for a business owner.