In a landmark ruling on Wednesday, the Supreme Court has put to rest a persistent dispute over service charge: No more service charge anywhere.

All service providers ranging from airports, drinking water suppliers, electric utilities and hospitals to banks, telecom companies, educational institutions, restaurants and hotels cannot add a service charge to the bill anymore.

The constitutional bench formed under the leadership of Acting Chief Justice Hari Krishna Karki and consisting of Justices Bishowambhar Prasad Shrestha, Ishwar Prasad Khatiwada, Ananda Mohan Bhattarai and Anil Kumar Sinha ruled that service charge was illegal, effective immediately as per the full text.

One of the judges told the Post that since Section 87 (3) of the Labour Act, 2017 has been declared void for contradicting the constitution, service charges are no longer legal.

“It’s a blanket ban,” said Prem Lal Maharjan, president of the National Consumer Forum. “No one can now add a service charge to the consumer’s bill. It also applies to the aviation industry or airports.”

On October 8, 2019, Maharjan had filed a writ petition at the Supreme Court seeking cancellation of the 10 percent service charge being added to the bill by hotels and restaurants.

“It’s a welcome decision,” said Maharjan. “It was against the Consumer Act and the constitution which stipulate that consumers cannot be cheated on the pretext of collecting a service charge,” he said.

Restaurant diners have often complained about arguments over the bill for being charged more than the menu prices. According to Maharjan, hotels and restaurants can now clearly inform their customers that tipping is voluntary.

The mandatory service charge system, first implemented in hotels and then in restaurants, came into force on January 1, 2007. Since then, almost all institutions have been collecting a service charge from their customers.

Hotel and restaurant customers have been paying 24.3 percent on top of the menu price—10 percent service charge, 13 percent VAT (value added tax) and 1.3 percent service tax. The VAT and service tax go to the government.

An employer operating any hotel, motel, restaurant, jungle safari or other business was required to distribute the service fees collected pursuant to the collective agreement as per Section 87 (3) of the Labour Act 2017.

Annulling the service charge, the Supreme Court ruled that Section 87 (3) was against the spirit of Articles 44 and 115 (1) of Nepal’s Constitution. Article 44 says that every consumer shall have the right to obtain quality goods and services; and Article 115 (1) says that no tax shall be levied and collected except in accordance with the law.

The full text of the verdict says that Section 87 (3) of the Labour Act 2017 under Article 133 (1) has been declared void on the ground of inconsistency with the constitution because it imposes unreasonable restrictions on the enjoyment of the fundamental right conferred by the constitution.

Maharjan said that hotels and restaurants cannot add VAT to the price of liquor either as it is prepaid.

Last August, the Kathmandu District Court, in a landmark ruling, ordered restaurants, hotels and resorts not to charge their customers more than the price listed on the menu.

Delivering the verdict on a consumer case filed by journalist Madan Dhungana on August 21, 2022, Justice Basudev Poudel declared that extra charges cannot be added to the menu price.

This effectively prevents businesses from adding 13 percent VAT and 10 percent service charge to the bill as they have been doing.

The bill issued by hotels and restaurants to customers from now on will not have VAT and service charge listed as before.

The service charge was made mandatory in 2007 in a bid to narrow the differences between hotel management and employees when their dispute was at its peak. As per the agreement signed then, employees get 68 percent and management gets 32 percent of the service charge.

In June 2018, a dispute arose between the Hotel Association Nepal and the Nepal Tourism and Hotel Labourers Association over sharing the service charge paid by consumers.

They eventually settled that hotel employees would get 72 percent, the hotel management would get 23 percent, Hotel Association Nepal would get 2 percent and the three trade unions affiliated to the Nepali Congress, CPN-UML and CPN (Maoist Centre) would get 1 percent each.

Consumer activists had then filed a case against the service charge.

“We were collecting a service charge from customers as per the law,” said Binayak Shah, vice-president of the Hotel Association Nepal. “We will definitely honour the court’s order.” He said that they had not received the full text of the verdict.

In 2017, the Indian government approved guidelines on service charge stating that it should be voluntary and not mandatory. At that time, according to consumer rights activists, only a few restaurants and hotels abided by the guidelines.

On July 4, 2022, India’s Central Consumer Protection Authority, issued guidelines to prevent unfair trade practices and contravention of consumer rights with regard to the imposition of service charge.

The guidelines state, “No hotels or restaurants shall add service charge automatically or by default in the bill." Under the guidelines issued, a consumer can lodge a complaint against the respective hotels and restaurants.

Araniko Rajbhandari, president of the Restaurant and Bar Association Nepal, said they had been waiting for a notice from the Department of Commerce, Supplies and Consumer Protection to effectively implement it.

In 2019, the Restaurant and Bar Association Nepal decided to scrap the service charge. The move was welcomed by the Federation of Nepalese Chambers of Commerce and Industry, Confederation of Nepalese Industries and 25 other business organisations.

But restaurants started adding a service charge to the bill again.

Many hotels and restaurants had been using the money collected as service charge to pay the salaries of their workers, and Wednesday's Supreme Court order banning service charge means extra expenses for them.

The government has fixed the minimum salary for all industrial workers at Rs13,450 per month.

Restaurant workers say that since they are being paid much less than the minimum, they need the extra Rs8,000 to Rs9,000 they earn through the service charge. The basic salary is very low and is compensated by tips collected as service charge, they say. 

The Labour Act clause has been corrected in this version. Error is regretted.