Govt threatens new taxes for hotels and restaurants that demand service charges

Skeptical that hotels and restaurants are following new regulations on service charges, the government is considering measures that would force them to pay taxes on tips.

The new guidelines, announced in April, direct hotels and restaurants to put up notices at “appropriate” places explaining that “service charges are discretionary”. They say that customers make an order in the understanding that the total cost will be the price displayed on the menu plus applicable taxes.

Charging anything more without consent, according to the guidelines, amounts to unfair trade practises under the Consumer Protection Act of 1986.

Ram Vilas Pasward, the Union minister of consumer affairs, food and public distribution, announced the new steps that the government will take in a series of tweets on Tuesday night. “In view of seriousness of issue, Deptt. of Consumer Affairs has written to CBDT [the Central Board of Direct Taxes] to consider inclusion of Service Charge while assessing Tax,” he wrote.

Paswan suggested that the government will actively pursue establishments that do not follow the rules. He wrote that officers in the department of consumer affairs have been directed to monitor cases involving excessive charges and that consumer rights organisations have been asked to find cases for “exemplary remedial action”.

Required tips usually range from 5% to 20% of the listed price, a senior official in the consumer affairs department told HT. So-called ‘service charges’, the official added, are often not passed on to the servers themselves.Though some hotels and restaurants have stopped demanding service charges, others maintain that they are legal.

The office of Prakul Kumar, secretary general of the National Restaurant Association of India, sent an email to HT in July objecting to the government’s position. “Guidelines are not laws,” said Kumar in the statement. “It is once again reiterated that as of now levy of service charge by restaurants is legal and does not violate provisions of the law. There are judicial pronouncements to support that ‘service charge’ can be levied by hotels and restaurants.”