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Barring restaurants from levying service charge is unfair, reeks of discrimination

Thomas Fenn writes: Service charge helps restaurant workers earn their fair share and optimises operations for a business owner.

Thomas Fenn writes: Service charge serves the important function of price transparency to the customer as well as the restaurant worker. (Express photo, Representational)

There seems to be a war with the restaurant industry over a sitting duck. We witnessed fireworks on the Fourth of July when the Central Consumer Protection Authority issued guidelines — this distinction is important because they are still guidelines at the time of writing and not law — with respect to the levy of service charge in hotels and restaurants.

The legality of levying service charge has been considered and addressed by the Supreme Court of India, high courts, the National Consumer Disputes Redressal Commission, the erstwhile Monopolies and Restrictive Trade Practices Commission and the Income Tax Appellate Tribunal and has been upheld in various judicial pronouncements.

The concept of variable fees and variable pay is neither unique nor one that dropped out of the sky. As customers, we encounter them under various aliases in the myriad services that we use every day because different businesses have and should have different pricing models. The restaurant service charge disproportionately garners hostility presumably because it is believed to be something that a customer should not have to pay.

The front of the house — restaurant-speak for the workers that interact with customers — does not make the restaurant. There are many workers that toil in the background to ensure that you have the meal that you love and yet they are at a distinct disadvantage from an earning perspective, simply because you do not see them or interact with them. Service charge, which is linked to the sales of the restaurant and independent of wages, formalises equitable, fair distribution across the board and discourages inappropriate incentives.

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Service charge also serves the important function of price transparency to the customer as well as the restaurant worker. A restaurant usually provides dine-in, takeaway as well as delivery services in tandem, each having its own cost constructs. Maintaining separate price sets for each of these revenue channels can be a mathematical nightmare and often confusing to the customer, which is why in most cases you see a baseline menu price with service, packaging and delivery charges, respectively, stacked on top of it, transparently and non-interchangeably.

The dynamics of real estate have undergone a sea of change in the recent past, especially in metro cities and high streets. It is rare these days that restaurants pay a fixed rent; they often have “revenue share” clauses built into their lease contracts. Service charge, understandably, is kept outside the mandate of shared revenues because real estate operators rightfully recognise that this isn’t revenue for the restaurant since it is distributed among workers. Restaurants are uncomfortable with the oft-touted solution of increasing menu prices to account for the service charge because of this butterfly effect — it means that they will now have to renegotiate rental contracts to their detriment, since the service charge is not a separate line item on the books.

The way in which the levy of service charge is being vilified reeks of discrimination, stemming from a mash of half-truths, ignorance and an unwillingness to listen. It flies in the face of the economic freedoms that the restaurant industry must enjoy on par with others; we are still the only industry that cannot claim tax inputs under the GST regime.

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I’m certain that I do not stand alone in the restaurant fraternity, when I say that I will have failed as an employer and a colleague if the financial welfare and stability of my employees depends on the supposed magnanimity of the average customer. It is, therefore, high time that we elevate the conversation around service charge and move it in the direction of how it actually helps a restaurant worker earn their fair share and optimises operations for a business owner.

The writer is partner at Mahabelly and member, managing committee, NRAI

First published on: 06-07-2022 at 18:06 IST
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