New Guidelines by Consumer Protection Authority on Levy of Service Charge

Introduction

The Central Consumer Protection Authority (CCPA) on 4^th July 2022 has issued ‘Guidelines to prevent unfair trade practices and protection of consumer interest with regard to levy of service charge in hotels and restaurants’[i] against hotels and restaurants charging ‘service charge’ from consumers despite the 2017 guidelines issued by the Department of Consumer Affairs prohibiting the practice. The CCPA has issued these guidelines exercising its powers under Section 18(2)(l) of the Consumer Protection Act, 2019.[ii] The object of these Guidelines is to ensure strict compliance with the Department’s 2017 guidelines by formulating a robust framework and to provide adequate measures for consumers against hotels and restaurants that flouts the guidelines.

Need for Guidelines

The Department of Consumer Affairs in December 2016 first issued a clarification[iii] on this subject matter in 2016. In the clarification, the Department took notice of the fact that hotels and restaurants are charging service charges at a rate of 5-20%, which would amount to unfair trade practice. After consultation with the Hotel Association of India, the Department clarified the position on levy of service charge in a food bill being based completely on the discretion of the customer / consumer and paying the same would be a voluntary action on their part. It was also made clear that no customer or consumer would be forced to pay the service charge on a food bill.

Subsequently, in April 2017 the Department had also issued ‘Guidelines on Fair Practices Related to Charging of Service Charge from Consumers by Hotels/Restaurants.’[iv] Vide these guidelines, the Department made observations on the increasing complaints against hotels and restaurants regarding collection of the service charge, despite it being declared voluntary. The Department also made observations that the practice of tips or gratuity has become a discretionary practice between customers and staff. On the issue of service charge, the Department made a pertinent observation that the component of service is inherent in provision / rates / charges of food and beverages that are ordered by a customer. Hence, the pricing of the product is expected to cover the services provided by the restaurants / hotels. Furthermore, collecting service charge in excess of the pricing displayed on the menu card would be a breach of the agreement between the customer and hotel/restaurant. This would amount to unfair trade practice[v] under the erstwhile Consumer Protection Act, 1986 (and now under the Consumer Protect Act, 2019). In the absence of strict regulatory and enforcement measures, the consumers were dependent and compelled to approach the concerned District or State Consumer Forum or Commission.

Overview of the Guidelines

The CCPA was established in 2020 and is a creature of the new Consumer Protection Act, 2019. CCPA has been set up to protect the interests of the consumers as a class against any unfair trade practices. Under Section 18 of the new Act, 2019, the CCPA has requisite powers to issue such Guidelines for protection of the interests of consumers as a class.

The new Guidelines have been issued by the CCPA to be an extension of the 2017 Guidelines issued by the Department of Consumer Affairs, on the same subject matter. Through these guidelines, hotels and restaurants are obligated to not undertake practices to prevent unfair trade, as enumerated below:

1. No hotel or restaurant shall add service charge automatically or by default in the bill;
2. Service charge shall not be collected from consumers by any other name;
3. No hotel or restaurant shall force a consumer to pay service charge and shall clearly inform the consumer that service charge is voluntary, optional, and at the consumer’s discretion;
4. No restriction on entry or provision of services based on collection of service charge shall be imposed on consumers; and
5. Service charge shall not be collected by adding it along with the food bill and levying GST on the total amount.

There have been instances and complaints made by consumers regarding the practices of hotels and restaurants that either deceptively include service charge in the bill under a different name, or refused service or entry to the premise to those consumers who do not agree to the levy of service charge by hotels and restaurants. The Guidelines issued takes cognizance of such unfair practices and resolve them by providing explicit prohibition on compulsory levy of service charge.

Measures under the Guidelines

With the CCPA Guidelines, the consumers are now provided with alternative measures that would allow investigations and further proceedings by the CCPA. Under the Guidelines, the following measures are available to consumers:

1. Make a request to the concerned hotel or restaurant to remove service charge from the bill amount.
2. Lodge a complaint on the National Consumer Helpline (NCH), which works as an alternate dispute redressal mechanism at the pre-litigation level by calling 1915 or through the NCH mobile app.
3. File a complaint against unfair trade practice with the Consumer Commission. The Complaint can also be filed electronically through edaakhil portal edaakhil.nic.in for its speedy and effective redressal.
4. Submit a complaint to the District Collector of the concerned district for investigation and subsequent proceeding by the CCPA. The complaint may also be sent to the CCPA by e-mail at com-ccpa@nic.in.

These measures provide for consumers to make a formal complaint against violating hotels and restaurants before competent authority, instead of directly approaching the State Consumer Forum or Consumer Commission. These measures also ease the mechanism of making a formal complaint by providing digital alternatives to traditional pen and paper.

Objections

Although these Guidelines can be called a major step in addressing the controversy behind the issue, contrasting opinions on the Guidelines have been raised by industry experts. One of the opinion is that the Guidelines are discriminatory and affects particularly the hospitality industry, in addition, contentions are laid that service charges allow hotels and restaurants to raise and pay wages to the workers.[vi]

However, the Union Minister of Consumer Affairs, Food and Public Distribution Piyush Goyal in a press conference held in June 2022 supported formulating the Guidelines and has welcomed increasing prices of the products, if necessary to raise wages of the workers, instead of levying service charge.

Key takeaway

Although the CCPA has formulated and issued the Guidelines, hotels and restaurant owners have objected to its forthcoming consequences. In addition, the Guidelines do not state that the levy of service charge is illegal per se. It allows hotels and restaurants to levy service charge on a voluntary basis where the customer would have the discretion to whether or not they want to pay service charge, but the same must be done after duly informing the customer.

A strict observation can be made that the new set of Guidelines issued is not a new law, as it reiterates the prevailing position. Nonetheless, what is now brought is a new and digitized enforcement mechanism for consumers to pro-actively participate in identifying violators and taking necessary action against exploitation.

[i] Central Consumer Protection Authority, Guidelines to prevent unfair trade practices and protection of consumer interest with regard to levy of service charge in hotels and restaurants [J-25/57/2022-CCPA], date 04 July 2022 (Download PDF).

[ii] Section 18(2)(I), The Consumer Protection Act, 2019.

[iii] Department of Consumer Affairs, Service charges by hotels and restaurant -Clarification regarding [J-24/9/2014-CPU (Pt)], date 14 December 2016 (Download PDF).

[iv] Department of Consumer Affairs, Guidelines on Fair Practices Related to Charging of Service Charge from Consumers by Hotels/Restaurants [J-24/9/2014-CPU(pt.)], date 21 April 2017 (Download PDF).

[v] Section 2(1)(r), The Consumer Protection Act, 1986; Section 2(47), The Consumer Protection Act, 2019.

[vi] Thomas Fenn, Barring restaurants from levying service charge is unfair, reeks of discrimination’ date 6 July 2022 (Download PDF).