A solution for the conundrum of GST on food delivery charges

GST law has put the onus of tax collection from both sides of the transactions on food delivery platforms.

By Bipin Sapra

Amid the relentless pace of technological advancement and changing consumer behaviours, food delivery platforms such as Zomato and Swiggy have carved out a substantial niche in the Indian market.

The societal benefits of this growth are tangible, as these platforms have become a lifeline for employment in the gig economy. By providing job opportunities to over 2.5 lakh delivery partners, they are addressing unemployment issues, especially among the youth and those seeking flexible work arrangements.

These gig workers have become the backbone of this burgeoning industry. However, as the average number of daily food orders surpass the 2 million mark, the role of these delivery personnel has captured the attention of revenue authorities, who are now keenly observing the tax implications of this rapidly expanding segment of the gig economy.

Onus of tax liability on ECOs

In the digital age, convenience is king, and food ordering platforms have capitalised on this trend by offering a seamless bridge between prospective consumers and a diverse array of restaurant partners. For facilitating the same, electronic commerce operators (ECOs) levy a set of charges, including commission and platform fees, from both the app users as well as the restaurant partners which is leviable to 18 percent GST.

In this regard, it is crucial to distinguish the role of ECOs - they are not the suppliers of restaurant services themselves but rather digital intermediaries that enable transactions between the two parties (i.e., app users and restaurant partners). This distinction is underscored by legislative measures, such as Section 9(5) of the CGST Act, 2017, which shifts the onus of tax liability for supplies made through these platforms onto the ECOs. This legal framework reinforces the notion that while ECOs are instrumental in the facilitation of food orders, the responsibility for the actual supply of restaurant services rests solely with the restaurant partners.

A platform is a facilitator, not service provider

Building on their role as facilitators in the food delivery ecosystem, ECOs extend their services to include the coordination of delivery logistics, acting as the conduit between the app users and the independent gig workers who perform the actual delivery of food orders. It is pertinent to note that the delivery partners, just like the restaurant partners, are engaged in independent supply of services (i.e., delivery of food orders) to the app users and ECOs merely act as a technology platform connecting them with the app users and not actually responsible for rendering of delivery services.

GST law doesn’t require ECOs to collect tax on delivery services

However, these gig workers, often hailing from lower-income groups, are usually unregistered for GST purposes and thereby, do not fall within the purview of GST applicability. Further, unlike the clear-cut tax obligations defined under Section 9(5) of the CGST Act, 2017, for restaurant services provided through the ECOs, the delivery services provided by these gig workers do not attract a similar tax levy in the hands of ECOs.

This absence of tax on the delivery component (either under Section 9(5) or Section 52 of the CGST Act, 2017) on the part of ECOs, while legally sound, has not gone unnoticed by revenue authorities. It presents a point of contention, as the rapidly growing volume of untaxed delivery services stands in stark contrast to the taxed transactions facilitated by the ECOs, drawing the gaze of tax officials who are vigilant about potential revenue leakages.

Mismatch between operational reality and tax claims

Historically, some ECOs initially took on the delivery responsibilities, paying the applicable 18 percent tax on delivery charges to prevent service disruptions due to the gig economy's unstructured nature. This was a temporary measure while ECOs explored various operational models. Once stabilized, these platforms returned to their core function of connecting users with restaurants or delivery partners. However, revenue authorities have alleged tax evasion, insisting that ECOs should still be accountable for the delivery services' tax liabilities, a claim at odds with the operational realities of these platforms.

In other words, the revenue authorities have maintained their stance of reinforcing the notion that ECOs are responsible for the supply of delivery services, a stance that contradicts their operational reality.

Possible outcome

With the 55th GST Council Meeting on the horizon, scheduled for December 21, 2024, it is anticipated that the GST Council will deliberate on this contentious issue. It would be interesting if the GST Council acknowledges the role of ECOs as mere technological facilitators and thereby holding delivery partners responsible for supply of delivery services and applicable tax payments.

However, given the gig economy's unstructured nature and the government's interest in safeguarding tax revenues, the GST Council may recommend bringing the ‘delivery services of food orders placed via ECOs’ within the ambit of Section 9(5) of the CGST Act, 2017, thereby placing onus on the ECOs for tax payments in relation to such services. Further, the Council might also recommend a tax rate of 5 percent for the delivery of food orders through ECOs, aligning it with the tax rate applicable on restaurant services.

(Bipin Sapra is Tax Partner, EY India. Mukul Goel, senior tax professional, EY India, also contributed to the article)

Views are personal and do not represent the stand of this publication.