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The battle over service charges

While the relationship between the Indian restaurant industry and its customers has generally been a happy one, there is one issue on which the two sides never seem to agree: the service charge.

Over the last few weeks, both sides have become agitated as the dispute has flared up again. The Central Consumer Protection Authority ruled on July 4 that service charges could not be mandatory.


If a consumer felt that she or he had not got good service at a restaurant, he or she could ask for the service charge to be removed.


   This was greeted as the last word on the subject till the National Restaurant Association of India (NRAI), an umbrella body representing restaurant-owners, responded on social media to say that the Consumer Protection Authority could only issue guidelines. They were not mandatory. And as far as the NRAI was concerned, its members could still impose a mandatory service charge. This led to more consumer anger and the cycle of complaints and responses began once again.


   Within the restaurant industry, the service charge is taken so much for granted that restaurateurs don’t understand why there should be so much outrage over it. In fact, the idea of an extra charge for service is not a normal practice across businesses and the restaurant industry is one of the few sectors that insists on it. If you go to a shop, try on some clothes and receive very helpful service before you make your purchase, you do not regard it as necessary to reward the shop assistant who helped you. The shop will not add a service charge and the assistant will be startled if you offer to tip him or her.


   Even within the hospitality industry, the idea of paying extra for good service is not universal. At a hotel, for instance, you may tip the waiters and bellboys, but it is very unusual to tip, say, the housekeepers who are the backbone of the hotel business. Nor do you tip the managers—at many top restaurants, servers can take home more money than the managers because of the cash they put away from tips.


  To be fair, the anomalies in this practice are not restricted to India. In most of the world, it is traditional to tip your waiter. At New York restaurants, a tip of 18 per cent of the total bill is not unusual: many guests pay more. If you don’t leave a tip, then don’t be surprised if the server chases you out into the street asking what happened to the tip. In many European countries, a service charge will automatically be added to the bill.


   Once you accept that it is normal to pay extra for service, then a service charge does make a certain amount of sense. When you leave a tip, it usually goes only to your server. But many others have contributed to the experience, so why should the server be the only one to be rewarded? The logic behind a service charge is that it is shared by all of the (non-managerial) staff of the restaurant so that servers are not disproportionally rewarded.


   When you explain all this to customers, they usually have many questions. The most basic one is this: if you call it a service charge and I get bad service, then why should I pay an extra service charge?


   In many countries, if you complain about how bad the service is, there may be a certain amount of unpleasantness but usually restaurants will agree to waive the service charge. In India, on the other hand, the NRAI takes the line that the service charge is mandatory, not a special reward. When the menu says that a service charge will be levied and the customer orders a meal anyway, then he or she has knowingly entered into a transaction. You can't refuse to pay for, say, the butter chicken if you did not like it. So it is with the service charge.


  "Despite my support for the industry, I find it hard to have much respect for the NRAI which, I believe, has contributed to the present climate where guests have no sympathy at all with the restaurant industry."

   Why, consumers also ask, can’t restaurants just go back to the old system of tipping, where guests had a choice? The restaurant industry responds, with some justification, that this is unfair because it rewards the server alone for an experience that many people have contributed to. Restaurateurs also say that Indians make bad tippers. Given a choice, many customers will leave no tip at all.


   So, if all this is so complicated, guests ask, why not just raise prices to include the money restaurants would normally add as a service charge. Once restaurants have the extra money, they can use it to pay their employees more. Why insist that customers pay a separate charge? Why not just reflect this charge in the prices on the menu?


   This is a hard one to answer. The basic reason may be that higher restaurant prices could scare customers away. I am not sure this is valid. If all restaurants add the service charge to their bills, then all prices will go up creating a level playing field. Once customers realise that eating out has become more expensive, there will be a one-time outpouring of anger rather than the constant feeling that they are being taken advantage of.


   The other reason has to do with accounting practices. A service charge is not added to a restaurant's profits and often not to its revenue. The argument is that this is a separate charge paid by consumers to the staff. Presumably this has some taxation implications but it also makes a huge difference to restaurants where the rent (or part of it) is based on profit-sharing (or a percentage of the turnover) with the landlord. If the service charge is absorbed into a restaurant’s revenues, then a chunk of it will go to the landlord who has had no role in creating the service experience.


   As you can see, the issue is not as black and white as either side seems to think it is: there are many shades of gray. While I remain a supporter of the Indian restaurant industry, I do not dispute that, over the years, restaurateurs have played their cards badly, never bothering to explain their positions to customers.


   Their whole attitude has been one of belligerence and confrontation and they have turned this into a restaurateur-versus-guests battle, which, surely, is a lunatic position for anyone in the hospitality industry to take.


   Despite my support for the industry, I find it hard to have much respect for the NRAI which, I believe, has contributed to the present climate where guests have no sympathy at all with the restaurant industry. All too often the NRAI has seemed to me to treat guests who were flummoxed by the extra charge as the enemy.


   I can give you a personal example. After I wrote an article here, when the controversy first started some years ago, sections of the NRAI leadership threatened to organise a boycott of EazyDiner, a reservation service in which I have a small stake. Though I pointed out that there was no connection between my journalistic views (which, by definition, reflect the interests of my readers and not those of fat-cat restaurant owners) and EazyDiner’s activities, they seemed determined to punish EasyDiner for my journalism.


   I explained to them that nothing they did to EazyDiner made much difference to me, but the threats persisted. I did not change my position (as you can see here!) and eventually the boycott melted away.


   I am not the kind of man who bears grudges but the episode seemed to provide an insight into the way the NRAI approached the issue: with threats and bullying of anyone who expressed an honest opinion. Is it any wonder that the industry has so little public support on this issue?


   Fortunately, the present head of NRAI, Kabir Suri, is a decent and thoughtful man who seeks to persuade, not threaten, and he makes a strong case for service charges. Nevertheless, it is difficult to overcome the tarnished legacies of his bullying predecessors.


   The NRAI’s current strategy seems to be to rely on legalities: if you order from a menu that mentions a service charge then you have entered into a binding contract etc. This may be valid but this is not a battle that will ultimately be decided in the courts. If customers feel they are being ripped off then eventually public opinion will force politicians to pass legislation that outlaws the service charge.


   All because the industry forgot what hospitality means and chose to fight when all it had to do was explain!



Posted On: 15 Jul 2022 12:00 PM
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