goods and service tax
In India, the practice of imposing service charges in restaurants and hotels has sparked considerable debate, particularly after the introduction of the Goods and Services Tax (GST). Many customers have expressed their discontent regarding these additional fees. This article aims to clarify the intricacies of service charges, define customer rights, and shed light on recent legal developments related to this issue.
Many establishments mislead customers concerning the nature of service charges included in their final bills. Usually added after the application of GST, these charges have led to consumer concerns. It is crucial for customers to understand that they cannot be compelled to pay service charges.
Mandatory service charges are illegal and infringe on consumer rights as outlined in the Consumer Protection Act, 2019. A penalty of ₹1 lakh was imposed on the National Restaurant Association of India (NRAI) and the Federation of Hotel and Restaurant Associations of India (FHRAI) for violating the guidelines set by the Central Consumer Protection Authority (CCPA). These charges must be voluntary; restaurants cannot deny service or entry to customers who refuse to pay them.
Regrettably, many patrons remain unaware that paying a service charge is not obligatory. Customers have the right to file complaints if they choose not to pay.
A service charge is an additional fee added to the overall bill by restaurants and hotels for the services provided. It is essential to note that the payment of this charge is not mandatory and is generally calculated after applying GST. Although most establishments quote prices inclusive of GST, customers often challenge the rationale behind a service charge added on top of the 18% GST.
A common misconception is that service charges are directed to the government; however, they are typically retained by the establishment as compensation for its staff. The standard service charge rate is approximately 10%.
On July 4, 2022, the CCPA declared that service charges should be optional, and customers cannot be coerced into paying them.
On April 12, 2023, the Delhi High Court ordered the FHRAI to change the term “Service Charge” to “Staff Contribution,” with a cap set at 10%. Furthermore, restaurants must indicate on their menus that no additional tipping is necessary beyond the “Staff Contribution” charge. This interim order was later superseded by a final decision on March 28, 2025, which emphasized the voluntary nature of service charges without mandating changes in terminology.
The court noted that these charges are often misleadingly categorized as taxes, prompting consumers to inadvertently pay GST on the service charge itself—creating a “double whammy” for consumers.
Service charges must not be bundled with food bills for the purpose of levying GST. When charged, they should be separately itemized and clearly marked as optional. If included in the bill, service charges are subject to GST.
Service charges, being a supply of service themselves, are generally subject to 18% GST if billed separately, as confirmed by the Finance Ministry and various tax commentaries.
Recent court rulings have clarified that service charges on restaurant bills are discretionary, meaning customers cannot be compelled to pay them. It is vital for consumers to be informed about their rights to manage these charges effectively.