Service Charge Notification Confounds Consumers, Industry in India

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By Dezan Shira & Associates

Last month, the Department of Consumer Affairs issued a notification that asked state governments to ensure the service industry understood service charges are voluntary, rather than mandatory.

The notification stated that hotels and restaurants must clearly inform customers that service charges are “discretionary and voluntary”. Further, the notification said consumers who are dissatisfied with services can request that service charges are waived.

The notification was made on the basis of fair trade practices outlined in the Consumer Protection Act, 1986. The commerce ministry’s notification indicates that the government views service charges as an unfair trade practice when hotels or restaurants present them as mandatory.

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What caused the notification?

Many media articles reported that the notification was inspired by consumer complaints over the quality of services provided by restaurants and hotels. Accordingly, the consumer affairs department moved to clarify that there was no legal basis for mandatory service charges.

Further, many observers speculated that the service charge notification indicated that government intended to increase the service tax in the 2017 budget. These observers believed that the government wished to soften the blow of a service tax hike by curbing service charges at hotels and restaurants.

However, the government made no significant changes to indirect tax laws during the 2017 budget. Government officials clarified that no indirect tax reforms will occur in the immediate term due to the forthcoming Goods and Services Tax (GST).

How is the notification being interpreted?

Given central government’s limitations, and its federal composition, the commerce ministry’s request to state governments is both obligatory and prudent. However, most state governments have not effected the notification in an efficient manner, causing confusion for consumers and the service industry.

Delhi, however, serves as a good example of how the commerce ministry’s notification will play out in other states and union territories once their respective governments begin enforcing the clarification.

The Aam Aadmi Party (AAP) government in Delhi welcomed the ministry’s notification given the party’s complete opposition to service charges. Following the AAP government’s notification to hotels and restaurants, compliant hotels and restaurants simply attached notes to their menus or displayed a sign indicating that service charges are not mandatory, but encouraged and appreciated by staff.

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Will the notification encourage consumer spending?

Many in the service industry have criticized the ministry’s notification: tipping is not a regular practice in India, and service charges of 6 to 20 percent helped lowly paid service staff obtain additional income. However, the ministry issued the notification to encourage consumer confidence and spending in the industry.

In any case, industry experts expect the notification to make an impact. Market observers should monitor how the change impacts the industry, particularly ahead of the GST, which will make a much bigger impact on consumer spending and operational costs for hotels and restaurants.

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