Impact on restaurant ecosystem of 5% GST rule on food aggregators

Food ordering from platforms including Swiggy and Zomato has become costlier yet again as they are now required to collect and pay tax on behalf of all restaurants. The new move comes as a result of the update issued by the finance ministry under which food aggregators are directed to pay five percent of Goods and Services Tax (GST) for cooked food orders through their platforms. Experts believe that the update will impact both end consumers and small restaurants. At the same time, platforms including Swiggy and Zomato are also expected to have additional compliance load due to the change in the tax regime.

“As ‘restaurant service' has been notified under section 9(5) of the CGST Act, 2017, the e-commerce operator (ECO) shall be liable to pay GST on restaurant services provided, with effect from the 1st January, 2022, through ECO,” the circular said.

Notably, the five percent GST requirement will be in addition to the existing 18 percent GST that platforms need to pay for offering delivery services through their platforms. The tax will essentially be applied to the price of the food item that platforms are delivering to customers. All of the taxes are eventually included in the customers’ bills. Restaurants would collect the GST (18 percent commission and five percent food GST) and pay it to the government.

The current reform proposes that instead of collecting the GST from restaurants, food aggregators will collect it directly from the customers at the point of delivery, thus if the reform goes as planned, there won’t be much difference in the customers’ bills, only if the recommendations propose ITC benefit to either the restaurant or the aggregator. “While consumers are seeing an increase in their e-com food bills it is expected that there would be a significant increase in the compliance load for e-commerce food operators,” said MS Mani, Partner, Deloitte India.

Why this step?

The GST Council approved this transfer of responsibility of collecting and depositing tax on food aggregators in order to crack down on restaurants that don’t pay taxes. The government had noticed that several restaurants were evading taxes though they were being collected from the consumer.

The system in place was confusing and led to tax evasion. The Department found huge differences between the taxable value reported by Food Delivery platforms in the TCS returns filed and the taxable value of supplies reported by restaurants in the returns.

The government estimates showed that tax loss to the exchequer due to alleged underreporting by food delivery aggregators is INR 2,000 over the past two years. Making these platforms liable for GST deposits would curb tax evasion.

Is it impacting consumers?

“The GST amendments are likely to impact end-consumers as cost of ordering from smaller restaurants who were hitherto outside the GST ambit will go up if ordered through food aggregators,” said Rajat Bose, Partner of law firm Shardul Amarchand Mangaldas & Co.

Tax experts however mentioned that small restaurant owners who come under the GST threshold of generating an annual revenue of less than INR 40,00,000 are not required to pay GST in a normal scenario.

How aggregators are impacted?

For food delivery platforms, this will also add more burden of compliance towards collecting and depositing taxes on behalf of the restaurants and maintaining additional records. The move may also create some confusion in terms of the applicability of input tax credits, for which food aggregators are expected to seek clarifications from the government.

Zomato and Swiggy, have also reached out to the government and sought clarification around the recent decision to treat them on a par with restaurants under the GST framework. Zomato and Swiggy, have also reached out to the government and sought clarification around the recent decision to treat them on a par with restaurants under the GST framework.

Are restaurants facing the heat?

“I don't think there is an impact at the moment on the consumer or at the restaurant end. I think the impact is gone to Swiggy and Zomato as they are collecting and paying for it. In a nutshell, the customer is still paying the five percent GST to the restaurants,” Gurmeet Arora, owner of Flax it up commented on the impact.

According to Harsh Shodan from Gourmet Kitchen and Studio, it's just a transfer from the restaurant to the aggregator.  Earlier what the restaurant would charge now is being charged by the aggregator. He feels that the decision should not have any impact on the food suppliers.

However, smaller restaurants with an annual turnover of less than INR 20 lakh are particularly being impacted by the decision. This is because most of these restaurants did not come under the GST ambit, according to various tax experts. However, they will now need to pay taxes as it would be collected by the aggregator on their behalf.

Once the food delivery apps start depositing tax on behalf of the restaurants, the eateries will also have to mandatorily register themselves under the GST as done by the e-commerce seller.

Where is the hiccup?

“The move will hit small players in the market and impact the customer base of the restaurants that are not yet under the GST regime due to low sales,” said Sarabjeet Singh, owner of pizza corner Sizzlin Slices.

Singh noted that while his restaurant is already paying the five percent GST, the update will make things cumbersome for his team as well as they will be required to look at how much the taxes are being directly paid through the platforms and what part they need to pay separately.

The Covid-19 pandemic increased online orders in the country as people were fearful of going out and eating in person. Many small restaurants also started entering into the aggregator's domain due to high demand. However, the move by the government may push street shops and local food corners to look for alternatives.

“Generating income after giving commissions to platforms is difficult for people like us. In such a scenario, how we would be able to manage the additional five percent cut seems like a mystery,” a small sandwich shop owner from Delhi who has registered his outlet in the delivery platform said.

Restaurants are charged five percent GST, but they do not get an input tax credit on the amount. An input tax credit is basically GST paid on input services or raw materials that can be set off against a certain kind of future tax liability. This means that the GST paid becomes pure cost. This would also be the case for Swiggy and Zomato if they paid five percent GST.

The food delivery platforms have huge costs in terms of technology and rent, and they would want an input tax credit too. The tax payers are further anticipating that the tax department too would not take objection when they are paying 18 percent GST instead of five percent. Companies are concerned and confused about the way the tax system works; they could see a jump in their total costs.