Service Charge in a Restaurant: Will Cost Comedown by Removing it?

The recent Government circular clarifying that service charges levied by hotels/restaurants are discretionary/voluntary has opened up a Pandora’s box. Everyone wants to have their say as to whatever suits them best. This has resulted in a verbal war in the social forums where no one is willing to actually listen to the other party but is happy to share their opinion.

To get to the root of the issue, it is important to understand what is a service charge. In the case of SS Ahuja v/s Pizza Express, Commissioner VAT v/s IIC, Service Charge is explained as:

“The charges so levied are not in the nature of compulsory tip but a commercial decision taken in accordance with the hospitality industry. In distinction to fast food restaurant, most of the hotels and restaurants as in the present case, in addition to personal services, provide services like liquid soaps, hand dryers, tissue papers, tissue rolls, toilet rolls, cloth napkins etc. For maintenance of a restaurant in a hygienic condition some extra amount is charged, which is also for certain magic show, mimicry shows etc. provided on holidays.”

Service Charge can be different in different restaurants and usually varies from 5% to 20% with most restaurants charging 10% on the bill amount before Government taxes and is shared with all staff members including service, kitchen and back staff. Service Charge is different from the service tax which is a Government levy.

The diners are naturally unhappy that even after paying huge taxes, they still have to pay the service charge that causes further dent to their pocket, while restaurants treat service charge as part of their pricing strategy. First let us understand the reasons given by diners who are against the service charge:

  • Customers who perceive service charge as a TIP say that TIP is a charge that should be left to the discretion of diners and should be paid after receiving the service. They should be allowed to pay less or more basis the quality of service received.
  • In the era of all inclusive pricing for most retail products, hospitality industry not only charges government taxes over and above the menu pricing but the service charge too. They also say that when all the other costs like rentals, electricity, etc are not segregated, why is only service cost charged extra?
  • If the service charge is to take care of the living of the service staff, then that becomes the responsibility of the restaurant and not the diners who are willing to pay a higher price as long as the experience encourages them to keep coming back to the outlet.
  • As a corollary to the above, some people also assert that the entire service charge is not shared with the staff.

The hospitality industry which is often too accommodating and happily obliges most requests of the guests who dine with them has its own reasons for not budging on this clause even though it has been a long standing concern. Basis discussion with Riyaaz Amlani, President – National Restaurant Association of India (NRAI), here are the various reasons why hospitality industry wants to stick with charging service charge.

  • Service charge is not a tip – you are welcome to pay tips or bakshish to the waiter of your choice if he has rendered service to your satisfaction. Service Charge on the other hand is a charge levied for various other services provided by the restaurant apart from the food for the comfort of diners like DJ, napkins, toiletries etc. including the breakage cost. It’s a breakup of the menu price done for transparency so that the management as well as the staff is aware of how much exactly was collected by way of service charge. Bifurcation also allows the customer to know that the extra services and the staff has been taken care of and thus they don’t feel obligated to leave a tip. If restaurants simply raise the prices by that 10 percent, the customer will still be in doubt whether he further needs to pay for extra services and give TIP making it even more expensive for the customer. Such collection is also good for the nation as all the money collected is accounted for and shared through cheque and reduces parallel economy that results from cash tips.
  • Service charge is an accepted practise in most countries. In the US, paying anything less than 20% is rude while Japan does not levy a service charge. In a sample study, it was found that Indians, even if they are not bad tippers, do not know how much to pay. To overcome that issue, a separate charge of 10% was introduced. It helps customers know that they have paid for the service received and they do not need to worry if any additional amount is required to be paid.
  • If the restaurants have to increase the menu pricing by the service charge amount, the diner will eventually shell out more. Not only will the Government taxes be charged on the amount but after some time, everyone will forget that service charge is already accounted for because of which they would again start leaving the TIP.
  • The restaurant shares most of the service charge collected after taking care of the breakages, extra services etc.

Even if one assumes that price points will come down initially, eventually the service charge will get in-built. Currently, the consumer pays for differential pricing in most of the service industry like movie halls, airlines, taxi, etc. where pricing is different for different days and time. In the restaurant industry, one hasn’t seen much of this strategy except for the buffet pricing. We have to accept that restaurants are not for charity and they are there to make money. Thinking aloud, if consumers put too much pressure on the current state of the transparent pricing, then this would lead to different menus with different pricing at different points of the day including congestion/peak/surge hour surcharge during the weekends which would be detrimental to the larger interest of all.

With several court rulings in the favour of service charge, Government has given the advisory beyond its scope. As per the contract act, if the restaurant has clearly displayed the service charge in the menu, then the customer has an obligation to pay. Also, all said and done, if one looks at the reasoning objectively, it is not the menu price but what one finally shells out that matters. As long as we enjoy going to a place at a particular price point, it really does not matter whatever the breakup is.


Food Critic and a Marketing Wizz who had a high profile career with leading MNC’s like HSBC, GE Capital etc, Pawan Soni comes across as a quintessential corporate employee. He left behind his successful career as the Vice President of a MNC... all for his love for food. He a WSET Level II wine connoisseur and a foodie who loves to eat anything under the sun. Besides being a food and travel writer for various food forums and magazines, he is the Founder and CEO of Indian Food Freak. As one of the initial bloggers who started his blog almost a decade ago, his website is currently one of the biggest food and travel blogs in the country. Pawan also conducts highly successful restaurant awards and recently concluded the 6th edition of The Big F restaurant awards. He won the best influencer awards in India by BBC Food Food Awards in 2018

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