India Regulates Tipping, Gratuity and Service Charges

Bakshish Please!
No Compulsory Tips!!
India Regulates Tipping, Gratuity and Service Charges

Stop the trade practice of collecting compulsory tips by levying the Service Charge as a part of the food bill. On April 21, 2017, the Government of India seems to have given a clear message to the Hotels & Restaurants owners.

Nature of Tips / Bakshish: When the Kings & Queens received extraordinary news or services from their subjects; they used to dole out the Bakshish to their subjects. British India experienced the practice to a different level and continued the Bakshish for the service, loyalty and at times alms. Independent India abolished the privy purses, kingdoms, fiefdoms, zamindari and other forms of societal divides but the practice of the Bakshish continued. Modern India experienced neo-rich and rich doling out tips, gratuities, Bakshish as a matter of practice. At times, tipping became very annoying. A bell-boy, a waiter or a purser actually waited, poised and gestured in very annoying manner and one was ashamed if one didn’t dole out tips. Unlike most of the other countries, where the tipping became a norm and one had to factor in up to 20% as tips, India following the Bakshish culture confused everyone on what the right tipping amount is. As per the Webster Comprehensive Dictionary, “tip” means small gift of money for service given, to a servant, waiter and porter or alike.

Tips as a part of Salary or Revenue Stream: Working in establishments that encouraged tipping meant that you earned tips more than your salary. The establishment owners realized that the tips were a part of revenue that was being generated within their establishment on which they had no control. 5 % to 7% of the hotel’s revenue constituted tips. The establishment owners became smarter and devised a way of charging Service Charge over and above the bill amount and collected at times almost 20% extra as and by way of the Service Charges. This became an independent revenue stream of the establishment owners. Almost invariably, only a portion of the money collected as and by way of the Service Charges found its way to the waiters, pursers, bell boys and those who served the customer. The Service Charges became a part of the bill and thus became Compulsory Tips!! A customer did not have choice of not paying even when the service was horrible.

What Courts said: In this regard, there has been very interesting discussion across plethora of judgments pronounced by Indian courts not about the Service Charge practice itself, but about Income Tax, TDS and  the collection of Service Charge & in turn payment (of part of collection)  to employees amounts to payment of ‘Salary’ (within the definitions under relevant Labor Laws).

Way back in 1976, in the Rambagh Palace Hotel, Jaipur vs The Rajasthan Hotel Workers[1] decided by the Hon’ble Supreme Court on 5 January, 1976 the then Hon’ble Justice VR Krishna Iyer held that:

“…It is well known that in important hotels in the country…the appellant is now a five star hotel…the customers are of the affluent variety and pay tips either to the waiters directly or in the shape of service charges or otherwise to the Management along with the bill for the items consumed. In Short, the true character of tips cannot be treated as any payment made by the Management out of its pocket but a transfer of what is collected to the staff as it is intended by the payer to be so distributed. It may also happen that more money comes in by way of tips into the pockets of the Management that is distributed by it …”

In 2011, in the Commissioner of Income Tax vs CJ International Hotels[2] in May 2011 while dealing with issue of TDS on Service Charge the Hon’ble Delhi High Court observed the following:

“… Once the tips are paid by the customers either in cash directly to the employees or by way of charge to the credit cards in the bills, the employees can be said to have gained additional income. When the tips are received by the employees directly in cash, the employer hardly has any role and it may not be even knowing the amounts of tips collected by the employees. That would outrightly be out of the purview of responsibility of the employer under Section 192 of the Act. But, however, when the tips are charged to the bill either by way of fixed percentage of amount, say 10% or so on the total bill, or where no percentage was specified and amount is indicated by the customer on the bill as a tip, the same goes into the receipt of the employer and is subsequently disbursed to the employees depending upon the nature of understanding and agreement between the employers and the employees. Different settings have different operating mechanisms with regard to collection and disbursement of the tips. Some of the outlets have in-built system of charging some percentage in the bills itself that may be either in the shape of “service charges” or “tips” or may be by any other name. Others leave it to the customers to indicate some amount either on percentage basis or in lumpsum as tips. In either case, these payments go to the receipts of the employer and are distributed either on weekly, quarterly or monthly basis. Such receipts at the hands of employees are nothing but their income for the purpose of Section 15. The system has been continuing and a large amount of income at the hands of the recipients generated through this channel of tips is escaping assessment. What is worse is that it is happening with the full knowledge of the employers, who are admittedly collecting and distributing this part of the income to the employees without evening knowing as to whether the same was being accounted for by them for the purposes of taxation or not. As soon as such amounts are received by the employer, an obligation arises on him to disburse the same to the rightful persons, namely, the employees. Simultaneously, a right accrues to the employees to claim the same from the employer. By virtue of his relationship of an employer and employee, a vested right accrues to the employee to claim the same …”

 There have been various judgments delivered by the Hon’ble High Courts and Hon’ble Supreme Court regarding the Service Charges dealing with TDS, Income Tax and Labour Laws. However, the practice of the Service Charge becoming ‘mandatory’ rather than remaining discretionary doesn’t seem to have been the subject matter of court decisions.

Service Charge as Trade Practice: On January 2, 2017, Press Information Bureau (“PIB”) of India, vide press release[3], stated that paying service charge is not mandated under any law and that a consumer can exercise his discretion to pay service charge. The Department of Consumer Affairs, Central Government sought clarification from the Hotel Association of India as well.  The Association had stated that service charge is discretionary in nature and in case a consumer is not satisfied with the service, he can waive off the same. PIB further stated that this practice which mandates the customer to pay service charge can be termed as an “Unfair Trade Practice” under CPA. The press release further advised hotels/restaurants to disseminate this information through display at an appropriate place in the hotels/restaurants that the service charge is discretionary and a consumer who is dissatisfied with the services can have it waived off.

I guess, the PIB press release didn’t have much impact. In fact, I have not seen any banners. As one post on the First Post put it[4]:

“… displaying that the payment of Service Charge is oservice_charge_LSPLptional displaying conspicuously the law that service charges are voluntary and that it is contingent upon services being found satisfactory is a farce. If displayed at the entrance, it would be the most embarrassing welcome a restaurant can extend to its customers and if displayed on the table, it might put an end to the appetite of the hungry family! Displaying the information that the staff in the restaurant is mandated to wash their hands after each visit to the washroom is confidence building whereas the display of the law on tips may well end up dispiriting the consumers …”

The Guidelines of April 21, 2017: Despite PIB press release, the Service Charge practice continued. The Government of India issued guidelines[1] attempting to regulate the practice of levying Service Charges and consequently curbing the practice of Compulsory Tips.  With these guidelines, entire Service Charge revenue stream of the hotels &restaurants has been killed.

There is no doubt that when a person visits a hotel or a restaurant for availing its hospitality service, which includes buying food & beverages and also avails their connected incidental services for consideration, such a person falls under the definition of “consumer[6]” under the Consumer Protection Act, 1986 (“COPRA”).] The COPRA also defines what constitutes Unfair Trade Practice[7] and Restrictive Trade Practice[8] Both the definitions are inclusive definitions; meaning thereby that other than those trade practices that have been provided for in the definition could also fall within the ambit of UTP or RTP. COPRA is basically an enactment that sets up and empowers adjudicatory mechanism for consumer disputes. It presupposed a dispute between a Consumer and supplier / provider of goods or services.

The Ministry of Consumer Affairs, Food & Public Distribution issued guidelines on 21 April, 2017 (“The Guidelines”). The Guidelines are meant for the protection of the consumers with regards to charging of the Service Charge. It was observed that as the customers were unaware about the provisions relating to the Service Charge, they continued paying the tips and gratuities in the bill. The Guidelines clarify that tip/gratuity and service charge stand on the same footing and hence, a consumer cannot be deprived of any service in case he chooses not to pay the same. The Government has distinguished between fair and unfair trade practices with respect to the Service Charge and issued guidelines that state the following:

  • The price of the product should cover the price of food as well as that for service.
  • Where a consumer places an order, he agrees to pay price of the product as well as applicable taxes only. Charging any extra amount, other than the price displayed on the menu without the consent of the customer would amount to unfair trade practice under the CPA. Unfair Trade Practice is that trade practice which the service provider adopts to promote sale or supply of any goods or service by an unfair or deceptive method.
  • Tip or Gratuity paid by the customer to the staff is for the hospitality received is to be considered as separate transaction between the customer and the staff of the restaurant, which is entered into at the consumers’ discretion.
  • Consumer is in a position to decide whether to pay any tip or gratuity after assessing the quality of service and not when entering the hotel or restaurant or placing the order. Hence, entry of the customer should not be considered as implied consent to pay service charge to restaurants or hotels and if an unjustified cost is charged to the customer, forcing them to pay service charge for food and services, it would amount to restrictive trade practice under section  2(1)(nnn) of the Consumer Protection Act, 1986. Section 2(1)(nnn) defines restrictive trade practice to include such a practice which tends to bring about manipulation of price in such a manner as to impose on the consumers unjustified costs or restrictions.
  • Therefore, the column of the service charge in the food and service bill must be kept blank, allowing the customer to fill it as per their assessment before making the payment. It should be clearly displayed in the bill that service charge is voluntary.
  • The consumer is entitled to approach appropriate Consumer Disputes Redressal Forum or Commission in case of any unfair/restrictive trade practice.

Fair Trade Practice / Unfair Trade Practice / Restrictive Trade Practice: The restaurants’ /hotels’ collection of the Service Charge from their customers if on voluntary basis and only if the customer is willing to pay would now be considered as Fair Trade Practice. The Service Charge column in the bill shall remain blank for customer inputs. The legal effect of the Guidelines is an interesting aspect. Do these Guidelines constitute ‘law’? As a student of law, I have always been fascinated by the practice of enlarging or curbing the scope & ambit of ‘law’ by issuing press releases, circulars, trade notices, guidelines, clarifications, circulars, etc. by respective ministries and the arms of the Government. There is no doubt that some of these communications will be considered as ‘the law’, some of them do not comprise ‘the law’. Whether the Guidelines constitutes applicable law is a question that would eventually be determined by a court of competent jurisdiction. The Guidelines clearly mention that it is the Government’s clarification.

According to the Guidelines “Placing an order by a customer amounts to his/her agreement to pay the prices displayed on the menu card along with applicable taxes. Charging for anything other than the afore-mentioned, without express consent of the customer, would amount to unfair trade practice as defined under the Act.”  The Guidelines further state that “Further, any restriction of entry based on this amounts to a trade practice which imposes an unjustified cost on the customer by way of forcing him/her to pay service charge as condition precedent to placing order of food and beverages, and as such it falls under restrictive trade practice as defined under section 2(1) (nnn) of the Act.”

Applying the definitions of UTP & RTP to the trade practice of levying & collecting the Service Charges, one wonders under which exact provision this trade practice would fall under. Or is it part of the “inclusive” nature of the definition? On UTP, the closest that one could consider is section 2 (r) (1) (ix) stating that it is  a trade practice “materially misleads the public concerning the price at which a product or like products or goods or services, have been or are, ordinarily sold or provided, and, for this purpose, a representation as to price shall be deemed to refer to the price at which the product or goods or services has or have been sold by sellers or provided by suppliers generally in the relevant market unless it is clearly specified to be the price at which the product has been sold or services have been provided by the person by whom or on whose behalf the representation is made”.

Guidelines: Effective or Ineffective?: There is no prescription or prohibition in applicable law today that declares the Service Charge practice as illegal or prohibits the levy and collection of the Service Charge. The Guideline does not appear to have made any Rule of Law, neither is it the legislation. It falls short of such prohibition or declaration. Understandably, the Guideline is not in the realm of legislative competence. It is an administrative action. At the end, the Guideline virtually encourages the consumers to approach the redressal forums under the COPRA for the adjudication of their disputes qua UTP and RTP.

By issuing the Guideline, would the Service Charge practice stop?gov_guidelines

The likelihood of such practice being stopped may well depend (a) how do the owners of hotels & restaurants react; and (b) on courts setting the precedent in an appropriate case.  A direct consequence of the Guidelines notwithstanding whether any legal precedent or legislation has prompted it, has clarified the Government’s position. In all probabilities, the Consumer Courts would follow or get influenced by these Guidelines. The Guideline in a way is a very welcome move since it moves the caveat-emptor (buyer beware) fulcrum to seller beware!! If a hotel or restaurant continues to levy the Service Charge as compulsory tipping system, the fear of facing and losing the consumer case would prompt them to stop such a practice.

[1] AIR 1976 SC 2303

[2] ITAs No.475/2010, 476/2010, 860/2010

[3] http://pib.nic.in/newsite/PrintRelease.aspx?relid=156064

[4] http://www.firstpost.com/business/service-charge-at-hotels-dont-be-fooled-by-govt-notification-it-has-just-passed-the-buck-3184786.html

[5] http://consumeraffairs.nic.in/writereaddata/Guidelines.pdf

[6] Section 2(d) of COPRA,1986

[7] Section 2(r) of COPRA, 1986

[8] Section 2(nnn) of COPRA, 1986

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One thought on “India Regulates Tipping, Gratuity and Service Charges

  1. The bigger issue here is the ignorance of consumers which encourages restaurants/hotel owners to neglect such provisions. In a country like India, lack of adequately informed consumers always benefits a goods/service provider. The entire ‘service charge’ scenario is a classic example of how any unfair trade practice is introduced by one, slowly undertaken by others and becomes a trend in the market.

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