Zomato has received a notice from GST authorities demanding Rs 803 crore in outstanding tax, including penalty and interest, covering the period from 2019 to 2022. The dispute centres on whether food delivery platforms are required to pay tax on their collected delivery fees, a matter of contention between these aggregators and the government.
Following a show cause notice issued to Zomato in December, the GST authorities proceeded with the tax demand after evaluating the company’s response.
The Rs 803.7 crore tax demand exceeds Zomato’s total profits since achieving profitability in the April-June 2023 period.
The company recorded Rs 351 crore net profit in fiscal year 2024, whilst the first half of the current fiscal year showed profits of Rs 429 crore.
Why has Zomato received the GST notice?
- Section 9 (5) of the Central GST Act specifies that platforms aggregating businesses across sectors, including food delivery, ride hailing and ecommerce, are responsible for collecting and paying indirect tax on behalf of their service providers.
- According to GST regulations, food delivery services attract an 18% tax rate. The government maintains that platforms must pay tax on their service fees since they are collecting these charges.
- The substantial tax amount covers the period from October 2019 to March 2022. GST authorities consider delivery as a service, making the fees collected by Zomato during this timeframe taxable.
- Delivery platforms explain that whilst they collect delivery charges from customers, these are transferred to delivery partners. A food delivery executive told ET: “In a large number of cases, customers are charged no delivery fees or discounted fees…but the delivery partners are still paid as per a standard per km fee basis. That’s the burden the platform takes to drive growth.”
Since January 1, 2022, digital food ordering services aggregating restaurants must collect and give GST for restaurant sales through their platforms. However, the regulations remained unclear regarding delivery fee taxation.
Industry organisations have requested the GST Council to provide clarity on whether delivery charges fall under taxable components, but no resolution has been reached.
Zomato’s response to tax assessment:
The company plans to challenge the tax demand through legal channels, beginning with the GST Appellate Tribunal, with potential for further court proceedings.
A tax specialist noted: “This will be a long-drawn battle before any material outcome emerges.”
What are the potential consequences?
The resolution of this issue may be prolonged due to anticipated appeals from both the organisation and regulatory bodies. A legal ruling mandating tax on delivery charges collected for gig workers could establish a precedent. This could affect various sectors employing gig workers for deliveries, including online grocery platforms, e-pharmacies and local logistics services.
Has this tax scrutiny been limited to Zomato?
Swiggy, the Bengaluru-based competitor of Zomato, received a show cause notice in December regarding similar concerns, with unpaid tax amounting to Rs 326.8 crore. However, Swiggy has not yet received a formal demand notice.
