India needs to review how it wants to extract tax from Zomato and Swiggy

• Zomato and Swiggy will be liable to collect GST on online orders of food, instead of restaurants.
• We don’t tax platforms like Amazon because we understand that they are marketplaces, why such difference with food aggregators, asks EY’s Bipin Sapra.
• The tax loss to the government due to alleged under-reporting by food delivery aggregators is ₹2,000 crore over the past two years.

India’s Finance Minister Nirmala Sitharaman on Friday announced that online food delivery platforms like Zomato and Swiggy will be the ones collecting goods and services tax (GST) from customers. The tax rate stays consistent at 5% and the ruling comes into effect on January 1, 2022.

Earlier, it was the responsibility of the restaurants to do the same. It did seem pretty fair though, given that restaurants were the ones actually serving the customers while these new age platforms only facilitated online ordering.

But it is what it is and the tax experts are not too impressed with it.

The partners of renowned law and consultancy firms agreed that taxing platforms like Zomato and Swiggy was not the right way to go about this. “Are we asking Amazon and others to pay the tax? No, because we understand that separate from where there is a buy and sell,” EY’s Bipin Sapra said, adding that food delivery platforms work in a similar manner.

But before we form an opinion about it, it is important to understand what this hullabaloo is all about.

‘It’s transfer of responsibility, not an add on tax.’

A customer pays a GST of 5% on each order they place, whether for dine-in or at-home delivery. The restaurants collect this GST because it is the one providing the services/product to the customers directly.

The Indian government has now decided that restaurants would not be the ones collecting the taxes on online orders accepted through apps like Zomato and Swiggy. Instead, these food aggregator businesses will be the ones doing so.

“They've actually said that these electronic commerce operators would be paying the tax on behalf of restaurants that are supplying customers through their platform. It is like a transfer of responsibility. The restaurant is not required to pay that, but yes they will continue to pay the tax for the offline sales,” PwC’s Anita Rastogi said in an exclusive interaction with Business Insider.

Therefore, it doesn't really have much of an implication on customers in many cases as the GST rate stays the same. In some, it does.

‘I already pay GST on order, why do I care who collects it?’

While the government of India is yet to issue further clarification on the new GST norms for Zomato and Swiggy, the current facts have actually made the platforms quite redundant. If restaurants are not supposed to collect GST on online orders, does this mean that placing an order directly from the restaurants will be cheaper than placing it through these platforms?

“If I order from a dhaba [roadside restaurant] next door and there is a 5% tax that Zomato charges, but if I call him directly, I don't have to pay 5% tax... Then that brings in inefficiencies and then takes away the whole purpose of having these platforms who are pushing the smaller players to reach a bigger audience,” Chilana & Chilana Law Office’s Sandeep Chilana said.

Even the tax experts or the platforms themselves are not too sure about how the government plans to play it out. Both Zomato and Swiggy have reportedly reached out to the government, seeking more details on the GST being levied on them. They are worried that this could lead to tax cascading (tax on tax). Abhishek Rastogi, partner at Khaitan & Co, also raised similar concerns.

There is one thing for sure — you will have more tax on your plate now.

Earlier, restaurants below certain thresholds were exempted from paying GST on online or dine-in orders. Thanks to the new policies, even those restaurants would be under the tax next and ordering from your nearest dhaba will get more expensive.

‘This is precisely why the government took this up’

Despite the increase in online ordering, the government of India has not been able to fill up its treasury at the same rate. “These restaurants were required to take the GST and pay the tax to the government, but somewhere down the line — through technology, artificial intelligence, etc — many of the restaurants are not paying this particular tax to the government,” Rastogi said.

As per the estimates, the tax loss to government due to alleged under-reporting by food delivery aggregators is ₹2,000 crore over the past two years.

‘But is there any way out?’

“The simplest solution which can be implemented as soon as possible was tax collected at source (TCS),” Rastogi added. Tax collected at source (TCS) is the tax payable by a seller, which he collects from the buyer at the time of sale.

Platforms like Zomato and Swiggy are liable to pay TCS of 1%, which highlights that the government had already taken cognisance of the issue. The experts agree that increasing the TCS was a much simpler and faster way to go about things here, instead of introducing a new tax altogether.

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