The 45th GST Council decided to formally tax the restaurant service supplied through e-commerce operators from January 2022. This had a serious bearing on tips and surge/ delivery charges. (Representative image)
The pandemic catapulted the utility of doorstep delivery services, especially food and groceries, to a higher level. According to research reports published by Finshots & Businesswire, online food/grocery delivery sales in India in 2021 reached a value of $ 4.98 billion and by 2023 this market is expected to grow to $ 38.83 billion.
Foodie Bay, now Zomato, was the first online food delivery aggregator app to provide such services to Indian consumers. The initial temptation for a consumer was quick and free delivery. However, it has become common for companies to include delivery or surge charges on all orders. The amount charged as delivery partner fees by the platforms is significant, and can often surpass the item value under the garb of variables like drop location, availability, weather, time, city, dish, fuel surges, distance pay, etc. Such surge or delivery charges are not always a part of the tax bill which the customer gets. We ask why.
The Taxing Problem
Prior to the 45th meeting of the Goods and Services Taxes (GST) Council in September 2021, restaurants had to bear 5 percent GST on restaurant services, without any input tax credit. The fitment committee in the 45th GST Council meeting recommended that it may be clarified through a circular that services by way of serving of food, door delivery and take-away by cloud kitchens/central kitchens are covered under ‘restaurant service’, and attract 5 percent GST without any input tax credit.
Accordingly, it was clarified that take-away and door delivery services of food were restaurant services. It appears that since the customer does not directly avail of the services of a delivery agent, nor does she have the choice of which delivery agent services or delivers to her. The responsibility for paying the tax on delivery services will lie with the food delivery apps.
It may be pertinent to mention that prior to the shifting of tax liability, the aggregator was collecting the tax from the consumers and passing it on to the restaurant. However, there were colossal gaps in the actual turnover and the turnover reported to the government.
The 45th GST Council took a decisive step in shifting the tax liability from restaurants to the food delivery aggregator – the objective was to reduce tax revenue leakages in food supplies without impacting consumers. It had noted that even though the tax rates are low, food delivery volume is high given the pandemic-induced change in lifestyle. The Council took into account estimates which outlined loss of tax to the exchequer due to alleged underreporting by online food delivery platforms.
Plugging The Leak
The online food delivery aggregators were registered as tax collectors at source, meaning they could collect tax from the restaurants. A number of GST unregistered restaurants were supplying via these delivery platforms. There was also no mandatory registration mechanism in place. This resulted in gaps in taxable turnover for suppliers where the tax collected at source (TCS) was greater than what was declared by such suppliers.
The 45th GST Council decided to formally tax the restaurant service supplied through e-commerce operators from January 2022. This had a serious bearing on tips and surge/ delivery charges – without any input tax credit, the cost for the end consumer increased.
At this juncture, it may be pertinent to moot as to who bears this cost.
The food delivery aggregators appear to characterise delivery partner fees as tips. It is a trite law that tips paid by customers are currently not subject to GST as there is no business activity involved. In such a case, the delivery partner fee is not taxable and is exempt from the tax bill. It might not be out of place to mention that the taxman’s decision generated insecurity among the aggregators that supplies other than delivery services via these platforms may also be taxed.
Similarly, for tips received via the aggregator platforms, in order to be exempt from tax, the platform needs to demonstrate that the tip amount has been passed through from the customer to the delivery partner and that each and every penny is being handed over to the delivery boys. The rationale for exemption from GST for delivery services valued under Rs 20 lakhs seems fair. Whether the objective of “pass-through” from customer to delivery partner is being truly achieved is yet to be determined.
It is likely that the policymakers deliberately decided not to bring the delivery charges under the ambit of taxation. Further, the labour and employment issues for low-paid workers may also have been a consideration. Nonetheless, the government will have to take a call on this issue someday, given that consumers are bearing the soaring costs while aggregators are profiting from it.
Renu Gupta is a Delhi-based advocate. Trisha Shreyashi is an Odisha-based advocate. Views are personal, and do not represent the stand of this publication.
