‘Service Charge‘ is a fee levied over and above the price of the food and drink for the additional convenience of serving inside a restaurant. It has to be noted that service charge is not a tax levied by Govt thus it is not mandatory to be paid.
Taxability – GST on Service Charge
There is no specific exemption from the levy of GST on service charges.
Therefore any amount paid to the hotel/restaurant along with the food bill GST needs to be charged on the entire amount including the service charge as the same be part of the value of supply u/s 15(2)(c) of CGST Act.
It has been similarly held by Bombay HC and upheld by Madras HC that the value of service charged would be included in the transaction value of the sale price (Sun-N-Sand Hotel Private Ltd. vs The State Of Maharashtra on 2 December 1968)
CBIC in its FAQs clarified that GST will be charged on the service charge extract below
Question
142 Will service charge, as charged by some restaurants, be treated as consideration for a supply and hence considered liable for tax?
Answer
There is no distinction between goods or services under GST. Service charge like any other supply will be leviable to GST. It is also clarified that service charge is not a statutory levy. It is not levied by the Government.
Source: https://cbic-gst.gov.in/faq.html
Note:
There can not be a levy of service charge on Takeaway as ordered by Delhi HC (National Restaurant Assn vs UOI 2022 (7) TMI 970)
GST will not be charged on service charges paid directly to the waiters
Legality
Service charge is voluntary
Central Consumer Protection Authority (CCPA) in its guidelines clarified that
Hotel or restaurant shall force a consumer to pay the service charge and shall clearly inform the consumer that the service charge is voluntary, optional and at the consumer’s discretion
There should not be any restriction on entry or provision of services based on the collection of service charges.
The service charge shall not be collected by adding it along with the food bill by default
In a subsequent development, Delhi HC stayed the operation of the above CCPA guidelines subject to the twin condition that
a. Desist from levying or including service charged on “take away” items
b. Ensuring that the levy of service charges in addition to the price and taxes and obligation of the customer to pay the same is duly and promptly displayed on the menu or other places
(National Restaurant Assn vs UOI 2022 (7) TMI 970)
Remedy in case service charge is levied
Consumers may make a request to the concerned hotel or restaurant to remove the service charge from the bill amount
Consumers may lodge a complaint on the National Consumer Helpline (NCH) by calling 1915 or through the NCH mobile app
Consumers may also file a complaint against unfair trade practices with the Consumer Commission. The Complaint can also be filed electronically through e-daakhil portal www.e-daakhil.nic.in for its speedy and effective redressal. Furthermore, the consumer may submit a complaint to the District Collector of the concerned district for investigation and subsequent proceedings by the CCPA. The complaint may also be sent to the CCPA by e-mail at [email protected]
Relevant Links
Ministry of Consumer Affairs
Guidelines 21/04/2017 – https://consumeraffairs.nic.in/sites/default/files/file-uploads/latestnews/Guidelines.pdf
Press release 04/07/2022 – Hotels or restaurants cannot add service charge automatically in Food Bill
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