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Zomato Gets Unpaid GST Notice of Rs 400 crore

By News Canvass | Dec 29, 2023

Who is actually liable to pay GST?? The Online delivery Platform or its Delivery Agent?? Zomato has raised these questions as it receives Rs 400 crore notice for not paying GST.

  • In a stock exchange filing on December 27th 2023, Zomato said that they received a show cause notice from the Director General of GST Intelligence, Pune Zonal Unit as to why an alleged tax liability of Rs 401.7 crore along with interest and penalty for the period from October 29,2019 to March 2022.
  • Zomato has received this notice under section 74(1) of the Central Goods and Services Tax Act, 2017.  Zomato however asserted that it is not liable to pay the amount as delivery charges are collected by it on behalf of the delivery partners.

Why Zomato Got such Notice???

  • DGGI has taken on the matter is “Food delivery is a service, so Zomato is liable to pay GST on service at 18% rate.” On the other hand, industry is of a view that  Zomato  is a  platform, and they hire gig workers on a per delivery basis and Zomato is just collecting these fees as a total amount which gets paid to the gig worker.
  • These gig workers are providing the service thus, it is on them to pay GST. But, since each gig worker is below the ₹20 Lakh threshold they are exempt from GST.” Simply put, as of now, food delivery platforms have to pay 5% GST on their food orders and not the restaurants.
  • In addition to the food bill, they collect certain charges for delivery, which is passed onto the gig workers. The contention is that delivery is a service provided directly by service delivery personnel to the customer and the platform is not required to collect GST on the same. In most cases, these delivery personnel would be below the GST threshold and hence not required to pay GST.
  • The GST authorities are contending that food delivery platforms are required to pay GST on these charges. Experts say that the real question, therefore, is whether this service is by the platform or by the delivery personnel directly.

Zomato ‘s Response

  • In response, Zomato said that it is not liable to pay any tax since the “delivery charges” are collected by the company on behalf of the delivery partners. Additionally, the delivery partners have also provided service to the customers and not the company. “This is also supported by opinions from our external legal and tax advisors,” Zomato said in an exchange filing, adding that it will file an appropriate response to the notice.
  • However, the company has highlighted that no order of any kind has been passed against the company and they have made this disclosure just as a matter of caution given the amount of tax in question. Zomato believes that it has a strong case on merit.

How GST Notice is Impacting the Food Delivery Agents ??

  • 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.
  • 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.

The Road Ahead –Taxation on GST Needs More Clarity

  •  Time and again, it has been observed that tax authorities are known to plug loopholes even when they are legal. When it is an open-and-shut case, it gets trickier for companies. If Zomato and Swiggy are indeed delivery companies that charge delivery fees, they have to be seen as service companies that are bound to pay service tax on the charges.
  • But the problem is that food is a complex business. Raw materials do not cost as much in making a cooked item as other incidental costs involved in packaging, managing restaurant premises and maintaining a labour force.
  • Being venture capital-funded companies usually means that the likes of Zomato and Swiggy cannot think of themselves as just glorified courier companies. So they get into partnerships and promotional work in complex business models that take their work into a fuzzy zone.
  • Trying to convert some of that fuzziness into profit-sharing opportunities while also being a delivery company is putting them under dilemma. As it turns out, tax authorities may be slow to understand it all, but when they come down on an industry, they do so pretty hard.
  • As a perceptive research paper said: “Swiggy’s revenue is based on three major streams- Advertising, Commission, and delivery fees whereas the three key pillars that drive Zomato’s revenue are Food Delivery, Dining Out, and Hyperpure.
  • To some extent, food delivery companies that run websites that have content and logistical muscle can add the apples of commission revenues with the oranges of service fees. However, in a cut-throat business where competition is intense but profit margins are high, there is a roller-coaster approach to promotions, technology, and partnerships. Zomato’s early honeymoon with big restaurants as a dine-in demand provider ran into hiccups when high-end restaurants found the platform not as palatable as their gourmet food.
  • Perhaps it is time for venture capitalists and entrepreneurs to realise that complicated business models can boomerang while simple business models may not be alluring to investors. You have to strike a balance somewhere.
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