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Service charge

Bhushan (Article) (91 Points)

28 January 2010

Hey members just to draw ur attention to my following query:

Service charge is generally collected by hotels from the guests who avail the lodging boarding facilities.

This is the amount which is collected by the Hotels and in lue of tips and the same is to be paid to workers/Staff later on.

Is it my duty as an auditor to check wether the same is being paid to the workers.?
Can it be treated as a part of there wage?
N wht should it be shown as ,a liability or as an income and then an expense?
Is there any statutary obligation for the payment of the same?

Thanking u in anticipation of a reply.

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3 Replies

Amir (Learner) (4016 Points)
Replied 28 January 2010

Dear Bhushan,

1) As an Auditor u can test check these payments if 100% checking is not possible.

2) It is treated as part of their wages/salaries

3) Now the amount to be paid is identifiable at the time of collections from the customer then u hcan follow either of the following method -

a) First Income & Then Expense

b) Simply show the Income as Net of expense.

whereas if the amount payable is not identified at the time of collectin from the customer then it should be shown as "First Income & Then expense"

4) No statutory obligation, it is the understanding between the hotel owner & the workers.

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Bhushan (Article) (91 Points)
Replied 29 January 2010

hey Aamir thanks for ur suggestion. but in the ESIC write up.i learnt that SERVICE CHARGES Service charges are collected by management of the hotel on behalf of their employees in lieu of direct tips and the same is paid to their employees at a later date. Such amount collected as ‘service charges’ will not constitute wages under Sec.2(22) of the ESI Act. In the case of ESIC Vs. M/s.Rambagh Palace Hotel, Jaipur, the High Court of Jaipur has held that ‘service charges’ are not wages under Section 2(22) of the ESI Act. This verdict of the High Court of Jaipur was accepted in the ESIC and hence no contribution is payable on ‘service charges. (Earlier instructions were issued vide letter No.P-12/11/4/79-Ins.Desk.I dt. 18.9.79)