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What Has Been the Impact Of Service Charge Withdrawal On the Restaurant Industry? Even though the regulations have left a major impact on the industry, it is still too soon to say what would the end result be

By Shaival Desai

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There have been many guidelines, rules, regulations and policies that have affected the Indian restaurant industry for good and for bad. One of them was the guidelines issued by the Indian Central Consumer Protection Authority (CCPA) on July 4, 2022, which ever since its release has been a point of contention between the said body and the Indian restaurant industry. These guidelines prohibited every hotel and restaurant from automatically adding the service charges to the bill or collecting service charges altogether. This body, which has been active in preserving customer rights, came to this resort after hearing many complaints about the service charge malpractice in the restaurant industry.

When the guidelines were published, they were immediately opposed by NRAI (National Restaurant Association of India), Federation of Hotels & Restaurants Association of India (FHRAI), and many restaurant owners. This case went to the Delhi High Court which is yet to take a final call but has asked every restaurant and hotel business to provide in writing and/or inform the customers about the service charges separately.

These guidelines, even though have been made for the benefit of the consumers, are a double-edged sword. While the restaurant owners consider the service charge as their business right, the customers have been hesitant about paying this charge post the 2017 guideline by the same body that gave them the right to pay or not pay service charges. Adding to that these new guidelines have definitely created a loop of confusion and mistrust for both parties.

Before these 2022 guidelines, the customers were paying the service charge and even often tipping. While the tips were being taken by the waiters for themselves, the additional service charge was considered a form of payment to the back-of-the-house staff and their service. But ever since this legal dispute, there has been a noticeable decrease in customers paying service charges and even leaving tips. Obviously, this is the outcome of mistrust and misinterpretation of the guidelines.

The restaurateurs disapprove of these guidelines as it has a clear impact on the remunerations of their staff and their profit margins. In addition to that, it has also created a bad reputation for the restaurant industry in the eyes of the customers. With the 2017 regulation, the restaurants and hotels had come under an obligation to inform customers about the service charges with the hope that they would feel well catered to and so would pay the charges. But now, with this new guideline, the chances are slimmer.

Additionally, the service charge does not apply to takeaway orders. Given the rise in online orders and self-pickups, restaurants are losing a large share of service charges anyways. Include to the expenses, the third-party commissions, packaging charges and other costs associated with online ordering.

These new guidelines resulted in the closing of many bars and liquor-serving establishments in Delhi, Mumbai and other cities. These outlets sustain service charges and if the customers refuse to pay, they lose profits. But if they increase the margin by the slightest, they lose customers. It is a deadly catch-22 condition.

The upside, if you wish to consider it so, is that businesses have drastically improved their customer service. They are doing everything possible, from improving the menu to offering loyalty rewards, to retain customers and prove the service charge to be worth paying.

NRAI has been a prominent advocate of the restaurant and hotel industry. However, CCPA too has been making a strong case for representing the customers. At the bottom of all this, it's the restaurants and hotels versus their own customers. Even though the regulations have left a major impact on the industry, it is still too soon to say what would the end result be.

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