Zomato: ETtech Explainer: The Rs 402 crore GST notice that sent Zomato’s shares tumbling

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On Thursday, shares of food delivery platform Zomato bucked the trend and opened 1.7% lower despite upbeat broader markets rally to set new highs. What triggered the fall was a show cause notice for Rs 402 crore in unpaid goods and services tax (GST) issued to the company by tax authorities.

What’s the latest development?

Late Wednesday, Zomato filed a notice with stock exchanges about being served a notice by the Directorate General of GST Intelligence (DGGI) on December 26, asking the Gurugram-based company to show cause on why a tax demand should not be raised on delivery charges it collects from its users.

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Zomato said it is not liable to pay these taxes as it only collects fees on behalf of its delivery partners. “Further, in view of the contractual terms and conditions mutually agreed upon, the delivery partners have provided the delivery services to the customers and not the company,” Zomato said. It added that it will submit a response to the show cause notice.

Why is Zomato being asked to pay such a large amount in tax?

The Rs 402 crore demand includes interest and penalties and is for the period between October 2, 2019 and March 31 2022. The GST authorities are of the view that Zomato is liable to pay the indirect tax on the delivery fees it collects from customers. A similar notice is also said to have been served to Zomato’s Bengaluru-based rival Swiggy for around Rs 350 crore.

Also read | Zomato receives Rs 402 crore unpaid GST notice, company contests charges

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How has Zomato’s stock responded to this?

While it opened 1.7% lower on the BSE at Rs 124.90, Zomato’s share price touched a day’s low of Rs 120.70 in early trade. The shares ended Thursday’s trade 3% lower at Rs 123.20 apiece.

What’s the point of contention?

Typically, in the case of aggregators like Zomato and Swiggy, gig workers operate as delivery partners and are paid based on the orders serviced. Users are charged a fee for this delivery, except in loyalty programmes under which the platforms waive the charges. Under GST laws, delivery of food is a service liable to be taxed at 18%, and the government is of the view that since the platforms have been collecting a service fee, they must pay the tax.

How long has this issue been in the making?

Starting January 1, 2022, online food ordering platforms that aggregate restaurants and arrange for food deliveries have been liable to collect and deposit GST on behalf of restaurants for sales made through them. However, at the time, no clarity was provided on the delivery fee component. The issue had come up once earlier this year as well, when Internet and Mobile Association of India (IAMAI) made a representation seeking clarity on the matter from the GST Council. IAMAI had highlighted that absence of clarity on GST for delivery services was leading to “inconsistent and incongruous positions” being taken by various jurisdictional authorities.

Could this have wider implications beyond Zomato and Swiggy?

Industry executives suggest if the precedent gets set on platforms paying GST on delivery fees collected on behalf of delivery partners, the tax net could be cast on operators beyond food delivery, and cover segments employing gig workers such as quick commerce, grocery delivery, e-pharmacies and package deliveries.

What do tax experts have to say on this issue?

Nitin Jain, partner at tax and audit advisory firm SW India, said as most gig workers are likely to be out of the tax net, this could be “an indirect attempt to recover taxes by the GST department.”

“In case the government wants to collect tax on these charges, they should amend the law prospectively to fasten the liability on ecommerce platforms like what has been done in the case of passenger transport services or restaurant services,” he added.

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