The Directorate General of GST Intelligence (DGGI), it is understood, wants these companies to pay 18 per cent GST by including the delivery fees collected from customers. Food delivery companies reportedly insist that the fees so collected go toward meeting the cost borne by delivery partners and, therefore, not be taxed.

Neither the government nor the affected parties have made any official statement since the news about the tax notices broke about a month ago. But it is imperative that both sides resolve the matter in the interest of the food services sector that has been one of the fastest growing in recent years.

Taxation of services is a relatively young concept in India. It was proposed for the first time in the Union Budget of 1994-95, in an attempt to expand the tax base and recognise the growing share of services in economic activities. A beginning was made by imposing a flat rate of 5 percent on taxation of three services – telephones, non-life insurance and stockbrokers. The scope of taxation of services has since dramatically expanded, as has the contribution of the services sector that now accounts for more than 50 per cent of India’s GDP and continues to grow fast.

Today, taxation of services is an integral part of the indirect tax ecosystem, or the Goods and Services Tax ( GST) regime. The Central GST (CGST) Act defines services to mean “anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged”.

Further Section 9 (5) of the CGST Act recognises that in certain situations an Electronic Commerce Operator (ECO) will have to pay tax for services supplied through it “as if he is the supplier liable for paying tax in relation to the supply of such service”.

The Case Of Zomato, Swiggy

If we take a step back and look at the press release dated September 17 2021, issued after the 45th meeting of the GST Council held in Lucknow, it becomes evident that ECOs were made liable to pay tax on the services provided through them, effective January 1, 2022.

The press statement went on to include restaurant services provided through ECOs, with some exceptions. Further it was clarified that services by cloud kitchens/central kitchens are covered under ‘restaurant service’, and would attract 5 per cent GST without input tax credit (ITC].

The Minutes of the 45th GST Council Meeting provide greater clarity and context. The Joint Secretary, Tax Research Unit, (in para 18.38 of the Minutes) explained “that if some restaurant is delivering through Swiggy or Zomato, then in the current situation the tax is being paid by the restaurant and not by Swiggy or Zomato, even though they collect it from the Customer, and pay it to the restaurant.”

It went on to say: Companies like Zomato and Swiggy “are acting as intermediary and they don't deposit GST to Government on restaurant services supplied through them. During examination of issue, on which Haryana has contributed significantly, it was seen that even though GST was being collected by Zomato, and reimbursed by them to the Restaurant, Restaurants in turn were not depositing the GST so collected by them and in Haryana, the evasion was to the tune of hundreds of crores.

When recovery was attempted after the discovery of the issue, it was found that the restaurant did not exist anymore at the premises. In relation to this, the proposal is that for supplies made through ECOs, that is when Swiggy or Zomato collect the tax, then they will pay the tax themselves to the Government, instead of the Restaurant. As there is no ITC allowed to restaurants, there is no ITC implication for the restaurants in the proposal, and the transactions would also get accounted for and would help in plugging the leakage”. (sic)

Again to quote from the minutes of the same meeting “the Secretary stated this is not a new tax as was being reported in the media; it is just ECOs collecting taxes and paying them to the Government. Tax will accrue to the respective state as it accrues today. JS TRU stated that this proposal is proposed to be implemented from 1st January 2022, and the few issues which exist, or are raised will be clarified.”

It was further clarified that what was being proposed is similar to what already exists in the case of entities like Ola/Uber who pay the taxes on the services provided by them through their drivers. The proposal was approved by the GST Council.

Accordingly a notification No.17/2021-Integrated Tax (Rate) dated 18th November 2021 was issued operationalising the recommendation of the GST Council. There were concerns raised by the industry, which led to further confabulations between the Central Board of Indirect Taxes & Customs (CBIC ) and the Industry. A detailed circular No.167/23/2021-GST dated December 17, 2021 was issued addressing a whole host of concerns.

What Does Law Say

There was no ambiguity that from January 1, 2022, the law required that ECOs pay tax to the government rather than the restaurant operator. The circular made no mention of delivery charges.

It is understood that the business model adopted by Zomato or Swiggy is that when a customer places an order, the order is assigned to a pick-and-delivery partner (PDP) that picks up the order from the location of the restaurant and delivers it to the customer. A delivery charge is collected from the customer for these service providers. No GST is being paid by the PDPs for the amount so collected.

Even before the GST Council decision, both these entities changed their business practices and commenced treating the PDPs as independent contractors responsible for providing the services.

In other words the PDPs were not said to be having anything to do with Zomato and Swiggy. Prior to this, until FY 2019-20, Zomato and Swiggy considered themselves as delivery service providers and were charging and paying GST at the rate of 18 percent as delivery fee from the customer.

The case of the DGGI, made in the latest tax notices, appears to rest on the premise that PDPs are not independent; that there is an artificial splitting of costs and that the entire process is controlled by these platforms.

The recruitment, training, insurance, incentives, uniform with the logo, are all provided to the PDP by Swiggy and Zomato. Hence, the notice would be suggesting that the delivery charges should be included while determining the tax liability of the ECOs. It is understood that the DGGI has proposed that a GST of 18 percent ought to be paid. Notices reportedly amounting to Rs 750 crore or more have been issued to these two entities. Input tax credit to set off tax paid at the earlier stages of the chain should be available.

The position of law is unambiguous. ECOs will have to pay GST. Delivery is a supply of service – an activity is being undertaken for a consideration. Obviously, the ECOss will argue that PDPs are independent and that the quantum of delivery charges would be well within the GST threshold of Rs 20 lakhs – hence there is no liability on the PDPs. They would suggest that ECOs are merely acting as technology platform providers.

If investigations reveal that there is no change in the business practice before and after FY 2019-20, the arguments of the ECOs become less forceful. All these arguments in any case will have to be tested on the touchstone of facts.

The other issue to be addressed is whether the rate applicable ought to be 5 percent without input tax credit or 18 percent with ITC. And if the levy ought to be effective from January 1, 2022 or from the earlier period.

Whether the GST on restaurant services is 5 percent without ITC or 18 per cent with ITC depends on the nature of the restaurant providing the service. The DGGI have typically played it safe and erred on the side of revenue. We will also have to wait and see whether the Central Board of Indirect Taxes and Customs (CBIC) will initiate similar action against all other ECOs.

The notices and the quantum involved have again raised a debate about the industry being subjected to “tax terrorism”. While framing any tax policy it is not always possible to anticipate all situations. But having deliberated on ECOs, it would have been nice if the GST Council had also deliberated on these aspects and taken a decision.

Alternatively, the CBIC circular dated December 17, 2021, which addressed a host of issues ought to have addressed this issue too and there would have been no ambiguity. Notices once issued tend to have a life of their own – they will now follow the long circuitous route of adjudication and appeal, unless wiser counsel prevails on both sides .

(The author is former chairman, Central Board of Indirect Taxes & Customs (CBIC). Views expressed are personal)