ViTWO 8,479 followers Follow November 23, 2023
The GST authorities have issued a demand notice to popular food delivery platforms Zomato and Swiggy, alleging non-payment of GST on the delivery fees collected from consumers.
In response, the Directorate General of GST Intelligence (DGGI) initiated an investigation, leading to a pre-show cause notice citing a cumulative GST demand of over ₹750 crore.
In this newsletter, we will discuss how this notice will affect digital food delivery platforms and what actually defines service under the GST Act.
Debunking the Dilemma: Service or Platform?
DGGI asserts that food delivery is a service requiring Zomato and Swiggy to pay GST at an 18% rate on delivery fees.
Industry experts counter, emphasising that these platforms merely act as intermediaries, with gig workers providing the service.
In Limbo: Industry Voices and Ongoing Negotiations
Industry experts propose a 5% GST on delivery charges, similar to the tax on food bills. However, no decision has been made by the GST Council yet.
Zomato and Swiggy are in discussions with GST authorities, presenting their perspective and contesting the demand.
What Defines a "Service" as per GST?
According to Section 2(102) of the Central Goods & Service Tax Act, 2017 (‘CGST Act’), “Services” means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged.
The statement ‘anything’ other than goods is a service raises the question of whether ‘anything’ truly means everything. If it does, then everything except goods falls under the category of services and is liable for GST unless explicitly exempted.
Therefore, for an action to be considered a service, it is crucial to assess it from the recipient's perspective. If the recipient desires to receive the action, then it qualifies as a service. However, if the action is imposed upon the recipient without their consent or choice, it cannot be considered a service rendered to them.
What is the "DELIVERY FEE" narrative?
The saga of delivery fees, a perennial point of contention for Swiggy and Zomato, has been a tale marked by disputes and controversies.
Zomato, in a strategic move, introduced Zomato Gold, a loyalty program designed to offset delivery fees through a monthly subscription. Swiggy responded in kind with Swiggy One, adopting a similar approach.
Sources cited by ET reveal an intriguing dynamic. While both platforms charge an average of INR 40 for deliveries, the actual cost incurred is INR 60. The platforms absorb this additional INR 20, a fact often overlooked in the fee debate.
Notably, Zomato and Swiggy jointly process a staggering 1.8 to 2 million daily orders across the country. The looming spectre of new GST implications threatens to disrupt their financial equilibrium.
Adding complexity, both platforms recently introduced a platform fee, ranging from INR 2 to INR 5 per order. Unlike previous models, this fee applies universally, impacting all customers regardless of subscription status.
In a twist of fate, Kotak Institutional Equities predicts that this platform fee will bolster Zomato's customer take rate and contribution margin. Zomato, amidst business restructurings, has recently achieved profitability in Q1 FY24. Simultaneously, Swiggy, poised for an IPO, claims profitability in its food delivery arm as of March 2023.
The Road Ahead - Seeking Clarity and Resolution
Experts emphasise the need for clear guidelines on the taxation of delivery charges.
The industry awaits Swiggy and Zomato's response and anticipates whether the matter will escalate to judicial authorities in the quest for a resolution.
ViTWO believes this latest tussle between the GST authorities and food delivery giants highlights the gaps in taxation in the digital economy, underscoring the necessity for a nuanced approach to address industry-specific challenges.