Service charge in restaurants may soon be taxable

13 Sep 2017 | By Gogona Saikia
Service charge at restaurants might soon be taxable

Five months after declaring that service charge at restaurants should be voluntary, the consumer affairs ministry has urged that such charge should be taxed.

This comes amid complaints by consumers about many eateries still levying service charges of up to 20%.

After the ministry issued guidelines against service charge in April, many restaurants had started displaying at their entry that they collect service charge.

In context: Service charge at restaurants might soon be taxable

BackgroundService charges an irritant for customers

In recent years, customers in restaurants have been required to pay a 'service charge' which is over and above local and central taxes.

Often this is in lieu off paying a tip and slowly the service charge became all pervasive.

The mandatory levy was applied by all eating establishments and customers were forced to pay even if they were unhappy with the restaurant's service.

The government's April 2017 notification

Over and above service charges, restaurants were charging 12.5% VAT and 6% service tax on food/drinks. Then in April'17, the government asked for the removal of service charge. It "issued an advisory to restaurants to remove levying service charge since it isn't a tax".
Love Business news?
Stay updated with the latest happenings.
How are restaurants getting around the guidelines?

LoopholesHow are restaurants getting around the guidelines?

Many restaurants now mention conspicuously that they compulsorily levy service charge. Though consumers can sue, they often choose to just pay up instead of getting into a long-drawn legal battle.

Meanwhile, some have taken to displaying signs proclaiming service charge is voluntary; the result is often the opposite as consumers now feel compelled to pay to avoid embarrassment.

13 Sep 2017Service charge in restaurants may soon be taxable

What does the government want?

The consumer affairs ministry wants the service charge collected to either be distributed among the staff. If not, it should be counted in taxable income, an official said. It has also urged people to move consumer courts if they find any restaurant slapping service charges.