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Picture Courtesy:  THE HINDU

Context:

The legality of mandatory service charges in restaurants remains under judicial scrutiny in India.

Background

Restaurants add a service charge—5% to 20% of the bill—to bill. This charge, unlike a tip (voluntarily given for good service), appears automatically on the bill, whether a person is happy with the service or not. The Central Consumer Protection Authority (CCPA), a government body protecting consumer rights, says this practice is unfair.

The CCPA argues that mandatory charges violate the Consumer Protection Act, 2019, while restaurants say they have the right to set prices under the Constitution’s Article 19(1)(g) (freedom to trade).

In July 2022, the CCPA issued guidelines banning restaurants from adding service charges by default. However, restaurant groups like the National Restaurants Association of India (NRAI) and the Federation of Hotels and Restaurants Association of India (FHRAI) challenge these rules in the Delhi High Court, arguing that service charges are a legitimate business practice.  

Government’s Stand

In December 2016, the Ministry of Consumer Affairs, took a pro-consumer stance, it sent a letter to all states, expressing that service charges are voluntary and can be waived if the customer is unhappy. Despite this, restaurants continue the practice, prompting the CCPA to issue guidelines in July 2022.

The Ministry of Consumer Affairs rules:

• Restaurants cannot add service charges automatically to bills.
• They cannot collect it under names like “staff welfare fund.”
• They cannot deny service or entry to customers who refuse to pay the charge.
• Goods and Services Tax (GST) cannot apply to service charges.

If a restaurant violates these rules, consumers can complain to the National Consumer Helpline (1915) or ask the restaurant to remove the charge. The CCPA insists that forcing consumers to pay is an unfair trade practice under the Consumer Protection Act, 2019.

Delhi High Court  

July 2022 Interim Order: When the NRAI and FHRAI challenge the CCPA guidelines, the court temporarily halts the rules. However, it orders restaurants to clearly display service charges on menus and premises, ensuring customers know about them upfront.

September 2023 Interim Ruling: The court directs FHRAI members to rename “service charge” to “staff contribution” and cap it at 10% of the bill. They must also state on menus that no additional tipping is needed. This rule doesn’t apply to NRAI members, who can still use “service charge.”

March 28, 2025, Ruling: Court upholding the CCPA’s 2022 guidelines. The court rules that:

• Service charges are voluntary, not mandatory.
• Forcing customers to pay is an unfair trade practice under the Consumer Protection Act, 2019.
• The practice misleads consumers, who might think it’s a government tax like GST.
• The CCPA has the authority to issue binding guidelines, not just advisory ones. The court dismissed the NRAI and FHRAI petitions, finding each ₹1 lakh for challenging the rules. It clarifies that voluntary tipping is allowed, but restaurants cannot add charges by default.

May 9, 2025, Appeal: The NRAI and FHRAI file appeals against the March 2025 ruling. The restaurant bodies argue that service charges, when disclosed, are a legitimate practice tied to employee wages and labor laws, not consumer law. The case remains ongoing. 

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Source: 

THE HINDU