JANAUARY 21, 2026

Mandatory Generosity - With GST!

By Vijay Kumar

EVER stared at a restaurant bill like you're deciphering hieroglyphs? There's the food, GST, and the mysterious "service charge" staring back at you - begging the question, are you tipping the waiter or funding their retirement plan? And somewhere between the soup and the samosa, you're left wondering if you've accidentally signed up for a pension scheme.

Look at a Sample Bill of a Restaurant

Note: GST is levied even on the service charge - yes, a tax on a tip. The double whammy of gratitude.

The Central Consumer Protection Authority (CCPA) set up in 2020 under the Consumer Protection Act, regulates unfair trade practices and misleading ads.

The CCPA on 4th July 2022 (F.No. J-25/57/2022-CCPA) issued guidelines to prevent unfair trade practices and protection of consumer interest with regard to levy of service charge in hotels and restaurants.

It essentially told restaurants: “Tips are not taxes, and coercion is not courtesy.”

The guidelines were clear:

- No automatic or default service charge in bills.

- No service charge disguised under other names.

- No forcing customers to pay it.

- No denying entry or service based on refusal to pay.

- No bundling service charge with food and then levying GST on the total.

Naturally, the restaurant lobby wasn't thrilled.

These guidelines were promptly challenged in the Delhi High Court, which gave its verdict on 28.03.2025 - 2025-TIOL-495-HC-DEL-ST

The High Court perceived many problems in the collection of service charge:

1. The nomenclature itself i.e., service charge, especially after the introduction of service tax, is confusing, deceiving and misleading;

2. In the various bills of restaurants, the charges are not comprehensible as different abbreviated versions such as 'VSC', 'SER', 'SER CHGS', 'S. CHARGE', 'SRVCGH', etc. are being used which results in confusion to the customers that the same may be a charge levied by the Government;

3. The nomenclature is also not being made visible in the bills generated by the establishments;

4. Service charge is added right below the total amount of the cost of the food, followed by GST and taxes. For any consumer who does not examine the bill thoroughly, the impression given is that the service charge is a component of tax;

5. The service charge which ought to be in the form of a tip or a gratuity to the staff after enjoying satisfactory services, has now been adapted and converted into some sort of levy.

6. Private establishments do not have the power to impose such levies or even collect such levies.

7. A compulsory mandatory levy is a sovereign function.

The High Court observed that there is no uniformity in the percentage of service charge collected. The manner of enforcement of payment of service charge is also coercive in nature. In some cases, service charge is being confused with service tax or a mandatory tax imposed by the government. In fact, for the consumers, the collection of service charge is proving to be a double whammy i.e., they are forced to pay service tax and GST on the service charge as well.

The High Court was not convinced with the submission of the Petitioners that service charge is used in some way for benefit of staff as it is a feeble argument to say the least. There is no evidence provided to show that the amount collected by way of service charge is in some way benefitting the staff. Even if it were so, it is only such amount which is voluntarily paid by customers that can be utilised for the welfare of the staff. Mandatory collections which are detrimental to customers cannot be justified on the basis of some hidden benefit to staff of the establishments.

It was noted that there are a large number of establishments which do not collect service charge.

The High Court found the illegality in the collection of service charge threefold:

(i) That it is mandatory and compulsory to pay an extra amount for service given by the restaurant and the same cannot be waived off even at the request of the consumer, who may be dissatisfied by the service.

(ii) The nomenclature associated with respect to collecting the charge i.e. 'levy' and 'service charge' is misleading the consumers; the terminology used by the restaurant establishments to collect the same misleads the consumers into believing that it is some kind of a tax or levy by the State.

(iii) Further, the same is not transparently being made visible to the consumers thereby affecting the consumer's right to know.

The Court concluded:

1. Service charge or TIP as is colloquially referred, is a voluntary payment by the customer. It cannot be compulsory or mandatory. The practice undertaken by the restaurant establishments of collecting service charge that too on a mandatory basis, in a coercive manner, would be contrary to consumer interest and is violative of consumer rights;

2. The collection of service charge and use of different terminologies for the said charge is misleading and deceptive in nature. The same constitutes an unfair trade practice;

3. The fact that service charge can be collected as it is part of a voluntary contract/agreement made by the consumer who enters the establishment and avails of the services after seeing the chargeability of service charge on the menu card is an argument which is not tenable as such a condition is onerous and constitutes an unfair contractual condition;

4. Consumer rights cannot be subjugated to an argument that a contract is being entered into by the consumer while entering the establishment to pay service charge as the payment and collection of service charge is itself contrary to law;

5. If consumers wish to pay any voluntary Tip for services which they had enjoyed, the same would obviously not be barred. The amount, however, ought not to be added by default in the bill/invoice and should be left to the customer's discretion.

6. The CCPA may consider permitting change in the nomenclature for Service Charge which is nothing but a 'Tip or a gratuity or a voluntary contribution'. Terminology such as 'voluntary contribution', 'staff contribution', 'staff welfare fund' or similar terminology can be permitted. The use of the word 'service charge' is misleading as consumers tend to confuse the same with service tax or GST or some other tax which is imposed and collected by the government.

The writ petitions were dismissed with costs of Rs. 1 lakh each to be deposited with Central Consumer Protection Authority to be utilized for consumer welfare.

Armed with the High Court judgement, the CCPA sprang into action and took suo motu cognizance against 27 restaurants located across the country, for violation of consumer rights and adoption of unfair trade practices under Section 2(47) of the Consumer Protection Act, 2019, relating to the mandatory levy of service charge.

Recently, the CCPA issued orders against two restaurants and observed;

1. The consumer rights includes- "the right to be informed about the quality, quantity, potency, purity, standard and price of goods, products or services, as the case may be, so as to protect the consumer against unfair trade practices" and “the right to seek redressal against unfair trade practices or restrictive trade practices or unscrupulous exploitation of consumers.”

2. It can clearly be concluded that when a restaurant displays a menu with specific prices, the consumer is duly informed about the cost of the food. However, if a mandatory service charge is added later, it conveys an express or implied representation that the restaurant, a service provider had deliberately concealed the actual price of the food and service thereof, constituting an unfair trade practice.

In the case of one restaurant, the CCPA ordered to:

1. Take immediate steps to modify the software generated billing system by removing default addition of service charge or charge by any other name.

2. Pay a penalty of Rs. 50,000/- for violation of Consumer Rights and Unfair Trade Practice.

3. Ensure prompt and effective redressal of consumer grievances, the restaurant's email ID available on its public platform should be active and functional at all times as mandated under The Consumer Protection Act, 2019.

In the case of the other restaurant, the CCPA ordered:

1. Refund full amount of service charge of Rs. 801 to the consumer.

2. Discontinuation of practice of levying service charge forthwith.

3. To pay a penalty of Rs. 30,000/-for violation of Consumer Rights and Unfair Trade Practice.

Many complaints were received from consumers regarding forcible collection of service charge:

1. Confused with service charge and GST levied by the Government; there were instances where the owners of restaurants had stated that service charge is a government rule.

2. Service charge was forced to be paid by the customers using brute force, threats, etc. In some cases, upon the customers refusing to pay the service charge, bouncers were called, and threats were issued to pay the entire bill (Mandatory generosity enforced with muscle!)

3. Complaints of some restaurants putting wrong GST numbers in the bill to avoid being traced were also made.

4. Service charge does not depend upon the quality of service provided and it is a mandatory payment.

5. Some consumers complained that service charge of 13% is being collected over and above the GST.

6. There were also examples of bills not giving the full expansion of the word 'Service Charge' and using the abbreviation such as 'VSC' for voluntary service charge, 'SC' for service charge, 'SER', 'CHGS', 'S. CHARGE', 'SRVCGH', etc.

7. The bills were also generated on dot matrix printers and the printout of the bill was barely readable.

Many of us have faced this. Most of us have swallowed it - along with the overpriced soup.

So next time you dine out, remember: service charge is optional. But if you do pay it, brace yourself - GST will follow. Because in the republic of chutneys and curries, even gratitude isn't safe from taxation.