Zomato and Swiggy, the prominent players in the food delivery industry, are facing fresh tax challenges. According to reports, both companies have been served notices for a combined Goods and Services Tax (GST) amounting to INR 1,000 Cr. The tax authorities have revised their perspective, now considering the delivery charges collected by these platforms as part of their revenue.
Sources familiar with the situation have revealed that both food delivery platforms are required to remit INR 500 Cr each. This amount represents the 18% tax imposed on the entirety of the delivery fees they have amassed since the initiation of their food delivery services, as reported by the Economic Times.
It is noteworthy that in January 2022, the Central Government included ‘restaurant services’ and cloud kitchens within the scope of Section 9(5) of the CGST Act, 2017. Consequently, platforms such as Swiggy and Zomato became subject to a 5% Goods and Services Tax (GST) on the ‘restaurant services’ they provide.
Nevertheless, ambiguity persisted regarding whether the delivery services and the associated fees collected would also be subject to taxation.
“Ours is a platform that brings the rider and the customer close to each other. The delivery fee is not our revenue, instead, it goes directly to the rider. This is an interpretation of guidelines and we have a clear go-ahead from the tax consultants,” a senior executive at a food-delivery platform was quoted as saying by the publication.
In fact, the individual quoted further emphasized that the platform consistently asserts the status of riders as contractors, not employees. Nonetheless, the government contends that the delivery executives or riders, by collecting money on behalf of the platform, contribute to the company’s revenue.
An email sent to Swiggy and Zomato did not garner any response as of the article’s publication.
The collection of delivery fees by Swiggy and Zomato has consistently been a subject of intense debate, frequently giving rise to controversies from various viewpoints.
Swiggy introduced food delivery fees to its customers in 2016, two years after its inception. Subsequently, Zomato followed suit and initiated delivery charges as well.
Following the implementation of a standard delivery fee, Zomato introduced a loyalty program, now known as Zomato Gold. This program allows users to waive delivery fees by subscribing to a monthly membership, which also includes additional benefits.
Swiggy similarly introduced Swiggy One with a comparable concept.
As per the sources quoted by ET, Zomato and Swiggy charge an average of INR 40 to deliver an item to their customers. However, the disclosed information indicates that the actual cost borne by the food delivery platforms is INR 60, with the additional INR 20 being absorbed by the platforms, as reported.
It has been reported that Zomato and Swiggy collectively fulfill 1.8 million to 2 million orders daily nationwide. The introduction of the new GST is expected to impact their cash flow.
Nevertheless, it is crucial to acknowledge that both Zomato and Swiggy have recently implemented a platform fee, ranging from INR 2 to INR 5 per order. This fee is applicable to all customers, regardless of their subscription status.
Read More: Zomato extends platform fee to wider user base, implements INR 3 charge in select cities
Also Read: Swiggy increases platform fee to INR 3 per order to boost profitability ahead of IPO in 2024
In a recent research note, Kotak Institutional Equities stated that the introduction of the platform fee would enhance Zomato’s customer take rate and contribution margin.
In the latest development, Zomato achieved profitability in Q1 FY24 following several business restructurings and increased monetization efforts. Simultaneously, Swiggy, gearing up for its IPO, announced that it attained profitability in its food delivery business as of March 2023.
Read More: Zomato turns profitable in Q1 FY24, reports INR 2 Cr consolidated PAT
Also Read: Swiggy’s strategic initiatives pay off as food delivery business turns profitable
Also Read: SoftBank to reduce stake in Swiggy as food delivery platform gears up for $1 Billion IPO