Cracking the Code: What's Behind Rs 402 Cr GST Notice to Zomato

It seems the popular food delivery startup Zomato is in trouble these days. In an unexpected turn of events, the share prices of Zomato witnessed a sharp fall over the past two days, sparking concerns among investors. The catalyst behind this downturn is a show cause notice issued to Zomato by the Directorate General of GST Intelligence (DGGI), demanding Rs 402 crore in unpaid Goods and Services Tax (GST).

What is the Show Cause Notice About?

The news broke out when Zomato disclosed the notice to the stock exchanges on Wednesday, revealing that it had been served the notice on December 26. The DGGI instructed the Gurugram-based company to provide justification on why a tax demand should not be raised concerning the delivery charges it collects from users.

Zomato, in response, asserted that it is not liable to pay these taxes as it merely acts as a collector of fees on behalf of its delivery partners. According to the company, the delivery partners, not Zomato itself, provide services to the customers based on mutually agreed contractual terms. Zomato has committed to submitting a detailed response to the show cause notice.

Historical Context and Lack of Clarity

The issue has been simmering for a while. Since January 1, 2022, online food ordering platforms have been mandated to collect and deposit GST on behalf of restaurants for sales made through their platforms. However, the specific inclusion of the delivery fee component lacked clarity. This ambiguity had been previously raised when the Internet and Mobile Association of India (IAMAI) sought clarification from the GST Council earlier in the year, emphasizing the inconsistent positions taken by jurisdictional authorities.

If the precedent is set for platforms to pay GST on delivery fees collected on behalf of delivery partners, it could have broader implications beyond the food delivery sector. Other segments utilizing gig workers, such as quick commerce, grocery delivery, e-pharmacies, and package deliveries, might also come under the tax net.

The Tax Demand Breakdown

The significant demand of Rs 402 crore encompasses interest and penalties for the period spanning from October 2, 2019, to March 31, 2022. GST authorities contend that Zomato is obligated to pay indirect tax on the delivery fees collected from customers. It is noteworthy that a similar notice has reportedly been served to Zomato’s competitor, Swiggy, with a demand of around Rs 350 crore.

The Bearish Response of Stock Market

The repercussions of the GST controversy would be seen in the Dalal Street. On Thursday, the Zomato shares dropped 5%. Opening 1.7% lower on the Bombay Stock Exchange (BSE) at Rs 124.90, the share price touched a day’s low of Rs 120.70 in early trade. Ultimately, Zomato's shares concluded Thursday's trade 3% lower at Rs 123.20 apiece.

Tax on Delivery Fees: What is The Point of Contention?

The crux of the matter lies in the interpretation of GST laws related to the delivery fees charged by platforms like Zomato and Swiggy. As per the government's stance, since these platforms collect a service fee, they are liable to pay the 18% tax applicable to the delivery service. This has triggered a dispute regarding the taxability of the delivery fee component.

The industry is closely watching how this controversy unfolds, as it could potentially reshape the tax landscape for various service-oriented platforms.

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