Fresh Tax Notice On Delivery Fees Puts Swiggy and Zomato In Distress

In a new tax trouble brewing for the food delivery giants Zomato and Swiggy, the duo has reportedly received notices for a cumulative goods and services tax (GST) worth INR 1,000 Cr, as the tax authorities now view delivery charges collected by these platforms as their revenue.

Both the food delivery platforms have been asked to pay INR 500 Cr each, which is the 18% tax levied on the total amount collected by them as delivery fees ever since they commenced offering food delivery, sources aware of the development told the Economic Times.

It is important to note that in January 2022, the Centre added ‘restaurant services’ and cloud kitchens under the purview of Section 9(5) of the CGST Act, 2017, which led to the likes of Swiggy and Zomato paying 5% GST on ‘restaurant services’ they offer.

However, it continued to remain unclear whether delivery services and fees collected from that would also be taxed.

“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 person quoted also said that the platform continues to emphasise that the riders are not employees but contractors. However, the government’s point here is that the delivery executives or the riders are collecting the money on the platform’s behalf, making it a revenue for the company.

Inc42’s email to Swiggy and Zomato did not elicit any response till the time of publishing the article.

The Story Of Delivery Fees

The delivery fees collected by Swiggy and Zomato have always been highly disputed from various perspectives, often also attracting controversies.

Swiggy started charging food delivery fees to its customers in 2016, two years after its launch. Following the suit, Zomato also kicked off delivery charges.

After normalising a delivery fee, Zomato introduced a loyalty program, currently known as Zomato Gold, to waive delivery fees in lieu of a monthly subscription amount which also comes with a few other benefits.

Swiggy also introduced Swiggy One with the same idea.

As per the sources quoted by ET, Zomato and Swiggy charge INR 40, on average, to deliver an item to their customers. However, the actual cost incurred by the food delivery platforms is INR 60 and this extra INR 20 is borne by the platforms, they said.

Reportedly, Zomato and Swiggy deliver 1.8 Mn to 2 Mn orders per day across the country. If the new GST comes into the picture, their cash flow will be impacted.

However, we must also note that recently both Zomato and Swiggy have started charging a platform fee ranging somewhere between INR 2 and INR 5 per order, which is applicable to all customers irrespective of their subscription.

Recently, Kotak Institutional Equities had said in a research note that the platform fee will increase Zomato’s customer take rate and contribution margin further.

Recently, Zomato has turned profitable in Q1 FY24 after multiple restructurings in its business and increasing monetisation. On the other hand, IPO-bound Swiggy also claimed to have achieved profitability in its food delivery business as of March 2023.