Service Charge in Restaurants: Center says still waiting for industry proposal

GST will subsume service tax and VAT

The ministry of consumer affairs, food and public distribution is still waiting to hear from the hotel and restaurant industry associations on how they intend to resolve the issue of levying service charges ‘unfairly’.

The matter had come to a head in early January when the ministry sent a directive to all state governments asking them to make sure that patrons at restaurants and hotels know the different between service tax — which was mandatory — and service charge — which was akin to tipping and therefore optional

The move to term ‘service charge’ as optional upset thousands of restaurant and hotel owners across the country as they did not consider it optional.

In fact, many restaurant owners depended on the ‘service charge’ to pay salaries of their waiting staff. It also acted as an incentive for the waiting staff to increase sales, as their own commissions increased with a higher bill.

“It is not just the owner but all the employees who are associated with a restaurant including the dishwasher, the caretaker, the toilet cleaner, all depend on service charge,” said Riyaaz Amlani, president of National Restaurant Association of India, in the wake of the notification.

He added that the service charge will be clearly intimated to customers at the time of taking their orders and if they refused to pay the same, they “would be advised to dine at a place that didn’t charge it.”

According to an official in the consumer affairs department, the department soon after called a meeting of various hotel and restaurant associations later on in January to resolve the issue.

“In the meeting, it was agreed that the associations would discuss the matter among themselves and come up with a solution,” the official said. However, he added, the associations have not come up with any proposal since then.

As a result, the issue of service charge remains as before — as an optional payment to be made by the consumer.


The issue of service charge also caused confusion in the minds of customers about the status of service tax, which is a 14% mandatory levy charged by the government on any service.

Many restaurants were adding the 14% service tax to the bill, which resulted in disputes with consumers who claimed that they had bought a product — which should attract value added tax — and not a service that would attract service charge.

The ministry official said restaurants were authorized to charge service tax, but not on the whole bill, but only on 40% of the bill.

“According Service Tax (Determination of Value) Rules, 2012, 40% of the final value of a restaurant bill was determined to be for the service and 60% for the food,” the official added.

As such, the service tax on the bill would come to 14% of 40% — or 5.6% — of the final bill.

Meanwhile, the confusion between the two will be removed on July 1 when both taxes will be replaced by the unified Goods and Services Tax or GST.