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Recent guidelines from the Central Consumer Protection Authority( CCPA) directing the hotel and restaurants to not charge service tax on the food bills from customers has made headlines on the front pages of the newspaper. The guidelines from the association have remarked that the automatic or by default charge of service tax without the customer's knowledge is illegal. In the absence of any specific statute or legislation to govern these service charges, implementing guidelines is difficult.

Service charge is typically a fee added by many restaurants to the bill of customers. The amount charged varies between establishments and is often used as an opportunity for owners to earn money from their workforce.

However, customers are often unaware that this service charge is not defined anywhere in the law. According to restaurants, a large portion of this fee goes to staff and the remainder going into a welfare fund. Customers can ask for their bill without paying any or all parts of “service charges” if they don't want them included on their final tally, some people tip directly instead. In many establishments, however, the backroom staff do not benefit from tips because owners assert that a service charge ensures fair distribution of gratuities and discourages employees from relying on incentives unrelated to their work.

Service charge is distinct from service tax. Service tax, which has been imposed by the government under the Finance Act of 1944, regulates how and at what rate a business should be taxed across all industries in India. Because many Indian customers do not tip, restaurants often include service charge in the bill. This covers the cost of tipping and is an efficient way for restaurant owners to ensure they make a profit on each meal.

The amount of the service charge is set by the hotel/restaurant and added to bills automatically. The establishment has full control over its own service charges. After receiving several complaints about service charges in consumer forums, the Ministry of Consumer Affairs issued guidelines empowering consumers by allowing them to choose whether and how much they would like to pay.

These guidelines benefit consumers and allow hotels/restaurants to collect service charges if they so choose. There have been several court cases in which restaurants were allowed to levy service charges based on the services they provide customers.

After these judgments and non-mandatory guidelines, the hotel/restaurant continued to add a service charge to its bills without informing or asking permission of customers. To protect consumers, the CCPA has issued new guidelines that prohibit hotels and restaurants from adding service charges to customer bills by default.

The Central Consumer Protection Authority has issued guidelines that prohibit hotels and restaurants from levying service charges automatically in bills. They have issued guidelines that hotels and restaurants must follow to protect consumers' interests, prevent unfair trade practices, and ensure the quality service.

In order to protect the consumers from such charges, the Chief Commissioner of CCPA Nidhi Khare has requested the consumers to take the initiative by speaking to the restaurants and the hotels to remove the service charge and in case where they does not accede to their demand, in that case they can also file a complaint on the National Consumer Helpline against those hotels/ restaurants. These complaints can be filed with the Consumer Commission and also with the District Collector. 

The guidelines issued in 2017 gave the customers discretion to pay or not pay a service charge. To reflect this option, restaurants were directed to leave the space blank so that customers could fill it in themselves before making payment. Hotels/restaurants cannot charge other prices than those mentioned in the menu and are not allowed to demand service charges.

Some restaurants and hotels continue to apply a 5% or 10% service charge in lieu of gratuities, In addition to the other taxes including GST on food and services.

Because there is no specific law that makes service charge discretionary to the consumers, these guidelines are biased toward them and completely ignore hotels/restaurants' interests.

Consumers will never want to pay a tip, and if it is left entirely up to them whether or not they do so—and there are no rules governing tipping policies—restaurants/hotels won't be able recoup the costs of providing their services.

To make up for the shortfall in revenue that would result from not charging a service charge, restaurants and hotels will raise their prices—which means consumers ultimately pay the cost of this stipulation. The state benefits from these restrictions since when hotels/restaurants raise their prices, they pay more in taxes. The consumer ultimately bears the consequences of such price increases.

In the case of the Federation of Hotels And Restaurant Association of India vs Union Of India And Ors, the Court said that "The customer does not enter a hotel or a restaurant to make a simple purchase of these commodities. It may well be that a client would order nothing beyond a bottle of water or a beverage, but his direct purpose in doing so would travel to enjoying the ambience available therein and incidentally to the ordering of any article for consumption." In another case of M/s. Hotel Savoy Bar & Ors. vs. The State of Kerala & Anr, the Court held that "the overcharging of MRP of beer was justified because the customer was paying not only for the product but also for satisfactorily rendered services and the ambience." 

Many hotels and associations have argued that it is legal to charge service charges because the law does not prohibit such things. But on the other hand, the ministry is of the view that the components of the service are inherent in the prices of food or beverages offered by the consumer. It is the desire of the restaurants and hotels to keep the prices of the food and beverages at whatever price they want and there are no restrictions on it. Therefore what the consumer consents is the price of the food or beverage along with the applicable taxes on it and not the extra amount, which if taken will be considered as the unfair trade practice. 

NRAI had challenged these guidelines in court. In the Delhi High Court, a stay was imposed on these guidelines on condition that hotels and restaurants ensure service charges are duly and prominently displayed on menus or other places—and cannot be charged for take-away orders.