On Friday, 17th September 2021, Union Finance Minister Nirmala Sitharam announced that the officials would start levying 5% GST on food aggregators like Zomato and Swiggy at the delivery point instead of restaurants.
While speaking on the upshot of the 45th GST Council meeting in Lucknow, the FM announced that there would be no new tax on online food delivery operators. However, they will have to pay 5% GST on the restaurant services they offer. These taxes, added Sitharaman, would be charged at the delivery time.
The FM clarified that it is not a new tax. There would be no extra money end-users have to pay than before, but only one minor teak.
Previously, restaurants used to pay that 5% on food orders. But tax evasion was quite prevalent. With online players directly collecting and paying taxes, there would be less room for tax evasions.
“Concerning Zomato-like operators and gig officers, the decision has been made that since the place where food is delivered would be the point where tax is collected, the Zomato-like operator who collects tax will pay up the GST on it,” stated Sitharaman (1).
Making further clarifications, Sitharam explained that cloud kitchens and central kitchens services are also included under the “restaurant service” and attract 5% GST, without ITC. In addition, alcoholic liquor for human consumption doesn’t fall under the “food and food products for the entry ordering 5% GST rate on job work services regarding food and food products.”
Is It a New Tax on Customers?
As per the GST Council announcement, this is not a new tax on customers. Previously, restaurants used to forward collected GST to the taxman. Under the new rules, online food delivery platforms will directly collect the GST from customers and forward it to the government.
It doesn’t mean there is a new tax on customers. It was already there. Only now, the GST they already used to pay on food delivered to their homes by companies like Zomato and Swiggy will now go to the officials from a different channel.
“Yes, there was a thorough discussion on Zomato-like platforms which collect from restaurants and deliver to people. The sum and substance of what is agreed are the places where the food is delivered would be the point on which the tax will be collected, the gig groups Zomato and others, and they will hence pay the GST on it,” stated Nirmala Sitharaman during the press briefing after the Friday’s 45th GST Council meeting (2, 3).
Why Was There a Need for Rule Change?
As mentioned, the bills customers paid on food delivery to their homes via online platforms already have a tax element. However, until now, these aggregators used to pay these taxes to restaurants, who then forwarded the same to the government officials.
Listed restaurants with online delivery companies pay 5% GST on the food bill. On the other hand, the food aggregators pay 18% tax on commissions from the restaurants.
However, as noted by Tarun Bajaj, the Secretary of Revenue (4), there were widespread instances of tax leakages, where restaurants were found not to pay their taxes.
“There were multiple occasions where we found that restaurants were not paying taxes. Some of them were not even available after a while. These days, a lot of orders are coming via food aggregators. Hence, if one places an order from a restaurant via these aggregators, the food delivery companies will collect the tax from the end-user and pay it directly to the authorities instead of paying it to the restaurant under the new law,” explained Bajaj.
In short, there is nothing new, no new tax or change. The GST Council only simplified the process and ensured that such tax leakages that may be happening could not happen.
Hence, if implemented, this new amendment will ensure the curbing of a high level of tax evasion. There would not be any big difference in the bill paid by customers while ordering food online.
However, the catch with the new rules is how different food items will invite different tax rate slabs. It would be interesting to watch if the government makes room for a uniform 5% tax charge on food delivery by these online aggregators (5).
“With food delivery companies under GST, we can curb a high level of tax evasion. Since food delivery is a service, it ought to be brought under the GST’s purview,” said Praveen Khandelwal, Secretary-General of CAIT (6). It is worth highlighting that the CAIT, The Confederation of All India Traders, raised the demand for quite a while now.
At present, these apps are registered as TCS, Tax Collectors at Source under GST. Available data also suggest that tax loss to exchequer because of alleged under-reporting by food delivery operators is about 2,000 crore INR over the last two years.
There have been no comments from Zomato and Swiggy. However, as per a media report citing anonymity (7), the companies will only have to figure out a mechanism wherein rather than transferring the collected tax from customers to restaurants, they will have to pay it to the officials.
Available media reports also suggest a need for such a proposal because there was no mandatory registration check by food aggregator companies like Zomato and Swiggy. Multiple unregistered restaurants are supplying via these platforms. Hence, as we advance, it would eventually become necessary for restaurants to register themselves.
The Impact of The New Decision
In the 45th meeting, the GST Council has decided to approve the proposal to treat food delivery companies like restaurants and levy 5% GST on their supplies. Now what?
The new rule essentially means that these companies will now have to collect 5% GST from consumers instead of the restaurants from whom they pick up orders.
As we noted earlier, there would be no new or additional tax on the end consumers. However, the levy will close tax evasions by unregistered restaurants.
Notably, the changes will come into effect from 1st January 2022. The online food aggregators can take the meantime to make changes in their software to charge such taxes.
“E-commerce operators are made liable to pay tax on following services they provide: passenger transport, by any motor vehicles through it, effective from 1st January 2022, restaurant services offered via it with some exceptions, effective from 1st January 2022,” noted the Finance Ministry on the GST Council’s decisions (8).
According to Mahesh Jaising, a Partner at Deloitte India (9), “the decision to make online food delivery platforms pay tax on supplies made by restaurants seems to have been made on empirical data of underreporting by restaurants, despited collecting tax on supplies of food to customers. There are expectations that the impact of the same on end consumers would be neutral where the restaurant is already registered. However, there could be an additional 5% GST going forward for those ordering from unregistered ones.”
As per Jaising, players can typically implement such a proposal in two ways:
- First Option: It includes food aggregators charging GST and restaurants not charging GST. It would be the same as cab aggregators. Under such an option, restaurants will need to have two separate invoicing systems; one for supplies in the restaurant and the other for aggregators.
- Second Option: It can include restaurants that continue charging GST where food aggregators are treated as suppliers and buyers. However, there would be a variance that the food aggregator would claim the credit. Overall, it would have the same impact on tax recovery from the food aggregator as the first option.
There is no impact on consumers as they are not charged anything extra.
However, tax industry analysts and experts say the new GST tax rules will highly impact small restaurants. It is especially true for restaurants with an annual turnover below 20 lakh INR since they were not previously included in the GST.
Moving forward, most restaurants will see it as an additional compliance load. They will be required to keep two separate accounts, one for their regular business and another for the business they do via Swiggy or Zomato.
- Online food delivery platforms such as Swiggy and Zomato will collect the tax at the last point of delivery and pay 5% GST on restaurant services.
- Rather than collecting GST from restaurants, food delivering companies will collect it directly from consumers. However, there won’t be much difference in the end-users bills.
- The new changes will come into effect from 1st January 2022, offering the players time to modify their systems and software to adapt to the new regulation.
Concerns With the Decision
At present, the GST Council has classified food aggregators as TCS. The reform will classify them as restaurant services, inviting a uniform 5% tax slab as per available reports.
However, different food items can invite different tax slabs. We can only get more information and clarity on how the GST Council will impose tax collection, a uniform 5% rate or 5% plus 18% rax, or different slabs for different foods when the officials will release a detailed circular(s) or notification(s) in the upcoming days.
Nonetheless, we believe it is an excellent decision made by the Council. In the upcoming days, we can also see officials mandating the same norms for all other aggregators, including ecommerce, B2C players, marketplaces, and other online services.
We can also consider the move as a part of enhancing (12) “Ease of Doing Business.” After all, upon broader implementation, general people who are not well-versed with computers, the internet, and taxes don’t have to worry about different companies. The onus is on the aggregators. Notably, as of writing this report, the World Bank has junked its ease of doing business ranking (13).
The move can also make it easier for the government to deal, instead of running after different people, enhancing (14) the “Ease of Governance.”
What are Some Other Decisions Taken By the GST Council?
After briefing reporters on the various decisions of the Council at the 45th meeting, and the first in the physical format after the outbreak of the coronavirus, the FM announced that there would be no GST on muscular atrophy drugs such as Viltepso and Zolgensma, which cost crores of rupees.
The Council has also extended the period of GST rates exemptions on certain drugs related to the coronavirus month by three months until 31st December 2021. However, there are no such benefits to medical equipment. Notably, there were NIL tax rates on Amphotericin B and Tocilizumab, whereas, Heparin and Remdesivit were cut down to 5% in June 2021. It has now been extended until 31st December 2021, from the current 30th September.
“We have witnessed in the past year and probably earlier that some life-saving drugs that are not directly connected with Corona are quite expensive. Hence, such drugs have been given tax exemptions. The name of these two drugs is mentioned because they are both pricey; Viltepso and Zolgensma. These two are essential drugs that cost more than 16 crore INR. Hence, the Council has decided to grant exemption from GST on these two drugs. Moreover, as suggested by the Ministry of Health and the Department of Pharmaceuticals, certain drugs for treating muscular atrophy are exempted from IGST on import for personal use,” added Sitharaman (15).
Notably, the concessional regime for some medical equipment will end on 30th September 2021.
In addition, the Council has dropped the GST rate on certain cancer-related drugs from 12% to 5% and fortified rice kernels from 18% to 5%. It has also reduced the GST rate on bio-diesel for blending in diesel from 12% to 5% while exempting the national permit fee for goods and carriage from the GST.
The finance minister further added that the Council has also exempted the import of leased aircraft from payment of I-GST. However, it is not the right time to include petroleum products under the GST, as per the Council.
Additionally, the panel also decided to levy 18% GST on all types of pens. And, there will be 12% tax charges on specified renewable sector devices. The GST Council has also recommended new rates for textiles and footwear from 1st January.
A group of state ministers, GoM, will also look at rate rationalization and related issues and make recommendations in the next two months, said Sitharaman.
There is also an exemption from double taxation on GST payable on import of aircraft and other goods imported on lease. The transport of export goods by air and vessels were previously exempt from the GST until 30th December 2021. However, the Council has decided to extend this exemption for another year. Notably, the authorities had offered this exemption because of the difficulties exporters were facing in getting a refund on ITC, Input Tax Credit because of technical issues on the GST portal (16).
Below is the summary of a few other decisions of the GST Council:
- Pens would attract a single GST rate of 18%
- Specified renewable sector devices would attract a 12% GST rate.
- There is a cut from 12% to 5% GST on biodiesel for blending with diesel.
- No decision to bring petroleum products under the GST
- No GST on Tocilizumab and Amphotericin, 5% GST on Heparin and Remdesivir
- 18% GST on locomotives, railway ports, and other goods
- There has been an extension of concessional GST rates on drugs used to treat coronavirus until 31st December 2021.
- GST Council has agreed to exempt national permit fees on the operation of goods carriage, charged by the states.
- GST Council will correct the inverted duty structure on textiles and footwear from 1st January 2022.
- There has been a reduction of the GST rate on fortified rice kernels that can be used in schemes such as Integrated Child Development Services to 5% from 18%.
- Training programs entirely funded by the central or state government are also exempted from the GST.
- Several life-saving drugs used to treat children have also received exemptions from the GST Council.
Click here to read the entire press release on the recommendations and decisions taken by the GST Council at the 45th GST Council meeting.