Zomato and Swiggy Under the GST Lens: What Lies Ahead

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Nadeesh Kareemdathil, Apoorva Bajj

Jan 8, 2024 — 3 min read

Zomato and Swiggy Under the GST Lens: What Lies Ahead

Zomato Ltd. and Swiggy, operated by Bundl Technologies Pvt. Ltd., are reportedly facing scrutiny from tax authorities, who have issued combined notices totaling Rs 750 crore. Zomato, the leading player in India's online food delivery market, has received a goods and services tax notice of Rs 400 crore from the Directorate General of GST Intelligence, as reported by CNBC-TV18. Swiggy, on the other hand, has been served a GST notice of Rs 350 crore by the DGGI. In January 2022, the Central government expanded the scope of Section 9(5) of the CGST Act, 2017, to include 'restaurant services' and cloud kitchens, resulting in Swiggy and Zomato paying a 5 percent GST on the 'restaurant services' they provide.

Zomato, the publicly listed entity between the two, recently disclosed its financial results for the quarter ended September 2023. The company reported a net profit of ₹36 crore, a significant improvement from the net loss of ₹251 crore in the same period last year. The revenue from operations surged to ₹2,848 crore, marking a 72 percent growth compared to ₹1,661 crore in the corresponding period the previous year. In contrast, Swiggy, an unlisted entity, declared profitability for the quarter that ended March 2023, according to CEO Sriharsha Majety's blog post in May.

Adjustments in Fees and Platform Charges
What Lies Ahead for Zomato and Swiggy?

Adjustments in Fees and Platform Charges

In October, Swiggy garnered attention by revising its platform fee from Rs 2 to Rs 3 for food orders. A spokesperson for Swiggy underscored that this adjustment aligns with prevailing industry norms. Back in April, Swiggy introduced a platform fee of Rs 2 per order, regardless of the cart value. Following suit in August, Zomato increased its platform fee from the initial Rs 2 to Rs 3 per order. Notably, Zomato also initiated the application of the platform fee to Zomato Gold users, who were previously exempted.

A Swiggy spokesperson defended the platform fee increase, stating that it aligns with industry practices applied by most service providers. Experts argue that major food delivery platforms serve as intermediaries, connecting consumers with independent delivery partners. Therefore, since there is no separate supply of services from the platform operator to the customer regarding delivery services, GST does not apply to the delivery partner fee charged by Zomato or Swiggy, according to Smita Singh, a partner at S&A Law Offices.

Delivery partners, commonly known as gig workers, function as independent contractors and are not classified as employees of the platforms. As the delivery charges constitute revenue for these independent delivery partners, the platforms are not held responsible for GST, according to Darshan Bora, a partner at Economic Laws Practice. Notably, delivery partners may be unregistered under GST and are not subject to taxation for their services if their turnover falls below the required threshold.

As per the CNBC-TV18 report, a senior executive emphasized that the delivery charge goes directly to the rider and is not considered revenue for the platform. The executive explained that their platform acts as a mediator connecting the rider and the customer, and the delivery fee is treated as income for the rider. Despite the platform's assertion that riders are contractors, the government contends that the money collected by riders on behalf of the platform constitutes revenue for the platform.

The GST department's attempt to attribute the liability for GST on delivery partner fees to eCommerce operators appears to lack a legitimate basis, as these delivery partners operate as independent entities. Shashi Mathews, a partner at Induslaw, suggests that the department's approach is an effort to place such liability on eCommerce operators by asserting that these platforms are service providers about delivery partner fees, despite contractual arrangements and the actual disbursement of fees by these platforms.

What Lies Ahead for Zomato and Swiggy?

The current requisitions from the Revenue Department are conveyed through a preliminary consultation notice. At this juncture, food platforms have the opportunity to furnish justifications for their assertions directly to the department. The platforms can articulate arguments, elucidate their positions, and address any apprehensions raised by the department. Alternatively, they can pursue a legal course of action by approaching the courts, specifically through a writ petition. They retain the option to contest the proposed requisitions, be it at the initial stage before a show-cause notice is issued or even afterward. Given the disposition of the revenue authorities, it is probable that the food platforms may find themselves compelled to seek remedies through legal channels, as suggested by Shashi Mathews from Induslaw.