• Notification Date: 01-01-2024
• Notification No: N/A

GST Notices to Zomato, Swiggy: Is the move warranted?

There has always been a discussion regarding whether the delivery of food as a service by the online delivery platform or its delivery agents are liable to pay tax on the delivery charge. The recent notices for payment of goods and services tax (GST) issued to online food delivery platforms Zomato and Swiggy has finally cleared this controversial issue. 

In a stock exchange filing on December 27, Zomato said that they received a show cause notice from the Directorate 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 31, 2022, should not be demanded from the company.  

“The amount alleged in the SCN is based on the amounts collected by the company as delivery charges from the customers on behalf of the delivery partners during the referred period,” Zomato said, adding that it strongly believes that it is not liable to pay any tax since the delivery charge is collected by it on behalf of the delivery partners. 

Previously, online food aggregator Swiggy is also understood to have received a similar GST notice for tax of about Rs 350 crore. The two companies have been under the lens of the DGGI for delivery charges collected by them and payment of GST on it. 

The issue is being debated by industry and experts as well who point out that the GST liability will depend based on the contract between the food platform and the delivery agent and who between the two undertakes the delivery. 

Sanjay Chhabria, Director, Indirect Tax at Nexdigm noted that the demands raised on Zomato and Swiggy are based on the amounts collected by the companies as delivery charges from their customers on behalf of the delivery partners and the GST liability on such delivery charges would depend on the contractual terms and conditions with the delivery partners, whether the same qualify as pure agent or any other non-taxable supply or they are being considered as intermediaries. 

In cases, where the company merely facilitates the collection of delivery charges on behalf of third-party partners, liability to GST would be dependent on the income or turnover earned by such third-party partners, which is a threshold of Rs 20 lakh for services.  On the contrary, where a company deploys own employees for delivering food to customers, it could be said that the company provides delivery services to customers and accordingly, be liable to discharge GST thereon. 

Nitin Jain, Partner at SW India noted that the demand on Zomato raised by the GST department is centred on the issue of whether the delivery of goods is a service by platform or is it a recovery of charges on behalf of gig workers. “Considering the contractual arrangement, the delivery fee is for an independent service to the customer and hence, is the revenue of service providers but not of the platform. Since most of these gig workers are likely to be out of the tax net, this could be an indirect attempt to recover taxes by the GST department,” he said. 

In case, the government wants to collect tax on these charges, they should amend the law prospectively to fasten the liability on e-commerce platforms like what has been done in the case of passenger transport services or restaurant services, Jain further said. A similar 5% GST is also levied on food services provided by restaurants including for dining and takeaway. 

In its filing, Zomato also noted that in view of the contractual terms and conditions mutually agreed upon, the delivery partners have provided the delivery services to the customers and not the company. “This is also supported by opinions from our external legal and tax advisors,” it said. 

Chhabria further said it would be interesting to see the rationale adopted by the GST Investigation authorities for raising such huge demands on Zomato and Swiggy for the past four years and if they have also covered their grocery delivery segments -- Blinkit and Instamart, as well as on case-to-case basis, how respite could be achieved before the courts of law. 

“It won’t be surprising if other industry players, food delivery apps and others resorting to such platforms like Zepto, FoodPanda, Dunzo, Eatfit etc. receive similar demands from the GST authorities, assuming even they have been following similar approach as above,” he further said.