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Tipping & Service Tax: Discretion or Compulsion?

and , May 12, 2016, 0 Comments

tipping-service-tax-marketexpress-inThis Monday we were hungry and we didn’t feel like eating food served in the office canteen. So we went to have lunch at a reputed restaurant located in central Delhi. The food was great and the service was good. At last, it was the time to pay the bill. We paid it without scanning it. Later on, while chit chatting it struck one of us how service charge and service tax are different. One of us pointed out that service charge is a tip, but shouldn’t it be at our discretion? Service Charge is not a government levy like service tax or VAT but it is a restaurant’s way of enforcing and collecting tips for its waiters and support staff.

There exist no legal guidelines for the same. The Ministry of Finance notification dated 1st June, 2015, says “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”. So basically, it is a kind of private tax. However, the point is do the restaurants really give out equally or not pay at all the service charge to its staff/waiters?

The argument is why they need an extra source of fund to finance their cost when they are able to cover the same by including it in the price of the food. Although in Singapore, service charge is levied by the restaurant, but it’s not distributed among the waiters. Moreover, in Taiwan, it is treated as general revenue. If at all, it is paid and distributed equally, then the marginal productivity of the staff will not be affected much. However, if the tip is paid at the discretion of the customer, then it would be according to the performance of the staff. It would work as an incentive and would increase his marginal productivity relative to the waiter who is under performing.

Service Charge is illegal in Mexico and is a violation of article 10 of the Mexican Federal Law of Consumer. In addition to it, Germany also considers it as illegal. However, tipping in Germany is regarded as good manner. Unlike in Germany and Mexico, service charge is per se legal under French law. In the United States of America, service charge is also mandatory. Nevertheless, disclosure of it is required only in some states like Florida.

In India, there is an ambiguity in law regarding service charge. Although the service charge is not levied by the government, rendering it as non-mandatory, but the restaurants all over India continue to levy the charge. The recent development in Chandigarh against the levying of service charge has made its administration to examine the issue with concern. In February, 2015 Punjab and Haryana high courts have stated that the levying of service charge by the restaurants over and above the service tax, needs to be examined. The growing protest against it has made the Chandigarh administration to consider it to be as an unfair trade practice.

Even after the notification by the Ministry of Finance, there still exists perplexity among consumers regarding the purpose of levying the service charge. Restaurants provide a number of services like air conditioning, music, good ambience, furniture etc along with the meals. However, it is highly likely that the cost of all these services is included within the cost of the meal, thus the only purpose left for levying the service charge can be tipping.

In India, the restaurants which levy the charge are required to display this information either in the menu card or somewhere inside the restaurant. Nonetheless, most of them only display about its applicability, but not the percentage they are going to levy. This clearly creates an information asymmetry for the consumers.In UK, the service charge is compulsory only when it is displayed in the restaurant and the customer is empowered to refuse to pay some or all of it at his own discretion. This is mandated as per the supply of Goods and Services Act, 1982. So, in India also the law should remove the ambiguity and mandate it in a way such that it is at the sole discretion of the consumer.

Moreover, the restaurants should provide complete information regarding the service charge. This should include the purpose behind the levy of service charge, the percentage to be charged and it should also make the consumers aware that this tax is at their own discretion. Furthermore, the percentage to be levied should be decided on the basis of some criteria. A mechanism needs to be developed to provide rating to the restaurants on the basis of their performance. And according to this rating, percentage slabs are to be created and service charge has to be levied on the basis of that.

We believe the only thing that should matter is whether the customer is happy with the service or not. The restaurants should not dupe the consumers; instead they should make the whole purpose of the service charge as an evaluation criterion of their performance.

The opinions expressed in this article are the author’s own and do not reflect the view of MarketExpress – India’s first Global Analysis & Sharing Platform or the organization(s) that the author represents in his/her personal views & opinion.