Restaurants cannot impose service tax mandatorily: HC

The Delhi High Court on Friday upheld the Central Consumer Protection Authority’s (CCPA) guidelines prohibiting hotels and restaurants from automatically levying a “service charge” on food bills.

These guidelines, introduced in July 2022 to curb unfair trade practices and protect consumer rights, were challenged by restaurant associations, but have now been upheld by the court.

Justice Prathiba M Singh, delivering the judgment, ruled that mandating service charges violates consumer rights and constitutes an unfair trade practice. The court added that service charges should be left to the consumer’s discretion rather than being imposed mandatorily.

The Federation of Hotels and Restaurant Associations of India (FHRAI) and the National Restaurant Association of India had filed separate petitions against the CCPA guidelines in 2022, leading to a stay on their enforcement later that year. However, the HC has now dismissed these petitions.

Meanwhile, the FHRAI has also urged the authorities to revise the GST structure for food and beverage (F&B) services in hotels. It has called for delinking F&B taxation from hotel room tariffs, arguing that the current system is unfair and operationally challenging.

Under the existing GST framework, restaurants in hotels charging Rs 7,500 or more per room per day attract 18 per cent GST on F&B services with input tax credit (ITC), while those in hotels with lower tariffs levy five per cent GST without ITC.

The FHRAI has proposed a flexible system where all hotel restaurants can choose between 18 per cent GST with ITC or five per cent without ITC, regardless of room tariffs.