New rules regarding levying service charge were introduced by the Sixth Amendment to the Employment Act which came into force on 1 January 2021. Following the Sixth Amendment, on 16 March 2021, the Labour Relations Authority published a regulation on service charge. This regulation outlines in detail how to collect, calculate and distribute service charge in the tourism sector.
We have presented below answers to some frequently asked questions about the new rules on service charge in the tourism sector.
What is the amount of service charge that can be collected?
All tourism establishments must collect a service charge of not less than 10 percent from every service provided from 1 January 2021 onwards.
In every transaction where service charge is collected, the amount collected as service charge must be stated.
Who must collect the service charge?
Service charge must be collected by “tourism establishments” such as resorts, hotels, guest houses, training resorts, transit hotels, city hotels, tourist vessels, yacht harbors, integrated tourist resorts and private islands from every service that is provided by such tourism establishments.
Service charge also must be collected by diving schools, spas, water sports facilities, excursion activities and restaurant facilities operating in any of the above tourism establishments.
Should service charge be collected from those services that are outsourced?
Yes. Service charge has to be collected from those services or facilities that are outsourced and run by a separate business entity within a tourism establishment.
In this case, service charge must be collected, computed and distributed by the outsourced party or by the separate business entity that provides the service or runs such facility.
Would service charges be collected from tourism establishments that are let out to third parties?
If a tourism establishment is let out in whole or in part for a specific period and value, service charge must be collected from the total value.
Similarly, if a tourist vessel is chartered for a specific duration, service charge must be collected from the total value of the charter.
What are the services and/or transactions that service charge does not apply?
- Services provided from facilities such as restaurants, cafes and canteens that are dedicated for the employees of tourism establishments
- Shops in tourism establishments that sell goods
- Rent collected from rooms or villas let out on long lease on strata basis
- Sale or transfer price of interests of a business associated with a tourism establishment
How do you determine the time of receipt of service charge?
The time of receipt of service charge is the time of delivery of a service to a customer. This applies even when a customer has paid in advance for a service in full or in part before receiving a service. The same rule also applies where a customer pays for a service in installments or later under an agreement.
How much should be distributed from the amount collected as service charge?
Every employer must distribute at least 99 percent of the amount collected as service charge in any given month.
Employers can only retain 1 percent of the amount collected as service charge as administrative fee.
How should service charge be calculated?
Service charge entitled to an employee per month is computed by using the following formula:
Service charge applicable per day of that month x Number of days worked by the employee on that month
Service charge applicable per day is computed by using the following formula:
Total amount required to be distributed as service charge on a given month/ total number of days worked by employees on that month
When computing and distributing service charge collected from a specific tourism establishment, the entire amount collected as service charge from various business activities conducted within the tourism establishment must be considered.
When computing service charge by Employer, service charge collected from outsourced services and facilities must not be included.
Are employees entitled for service charge during leave days?
Paid leaves and rest days entitled to an employee under the Employment Act must be included when calculating the monthly service charge entitled to an employee.
How should the service charge be distributed amongst employees?
Employers must distribute the previous month’s service charge before the end of the current month among all employees equally. This includes employees who indirectly participate in providing services.
Are employees entitled to know how much was collected as service charge by the establishment?
Employers are required to disclose the total amount collected as service charge in the previous month and the amount entitled as service charge to the employees who worked in that month. This information must be made available to the employees before the end of the current month.
What are the record keeping requirements on establishments that collect service charge?
Tourism establishments that are required to collect service charge must keep and maintain the details of:
- total amount received as service charge for the month;
- amount deducted as administrative fee;
- total amount of service charge entitled to the employees;
- details of the employees who worked during the month (name, designation and identity/passport details);
- number of days each employee has worked during that month;
- amount payable as service charge to each employee during that month; and
- amount distributed as service charge to each employee during that month
This information must be made available to the Labour Relations Authority upon its request.
Additionally, these records must be submitted bi-annually to the Labour Relations Authority and Maldives Inland Revenue Authority. Records of the first six months of a year must be submitted before 1 October of each year. Records of the following six months must be submitted before 1 April of the following year.
Are there any penalties on tourism establishments for non-compliance?
Employers of tourism establishment will be penalized in fines for:
- Failure to levy service charge from the services provided or failure to distribute service charge among the employees. The penalty is a fine not exceeding MVR 100,000;
- Failure to maintain records of details. The penalty for first time violation is a fine not exceeding MVR 10,000. For every repeated violation, a fine not exceeding MVR 50,000 will be imposed;
- Failure to submit information to the authorities. In such an event, a period of seven days will be given to submit overdue information and failure to do so the first time will result in a fine not exceeding MVR 25,000. For every repeated violation, a fine not exceeding MVR 50,000 will be imposed.
All penalties will be imposed by the Labour Relations Authority and must be paid to the Maldives Inland Revenue Authority.
