“Directorate General of GST Intelligence (DGGI) has issued a GST demand notice to Zomato & Swiggy after the Pune zone of DGGI initiated the investigation against Zomato & Swiggy on non-payment of GST on delivery fee charged from the consumers for the period between July2017-March 2023,” sources informed CNBC-TV18.

Sources added, “demand notice is a pre-show cause notice alleging non-payment of GST worth over ₹400 crore from Zomato and for Swiggy is around ₹350crore.”

Sources say that the view DGGI has taken on the matter is “Food delivery is a service, so Zomato & Swiggy are liable to pay GST on service at 18% rate.”

On the other hand, industry is of a view that “both Zomato & Swiggy are platforms, and they hire gig workers on a per delivery basis and Swiggy and Zomato are just collecting these fees as a total amount which gets paid to the gig worker. These gig workers are providing the service thus, it is on them to pay GST. But, since each gig worker is below the ₹20 Lakh threshold they are exempt from GST.”

Simply put, as of now, food delivery platforms have to pay 5% GST on their food orders (and not the restaurants). In addition to the food bill, they collect certain charges for delivery, which is passed onto the gig workers.

The contention is that delivery is a service provided directly by service delivery personnel to the customer and the platform is not required to collect GST on the same. In most cases, these delivery personnel would be below the GST threshold and hence not required to pay GST.

“The GST authorities are contending that food delivery platforms are required to pay GST on these charges,” shared a tax expert who did not wish to be quoted.

Experts say that the real question, therefore, is whether this service is by the platform or by the delivery personnel directly.

“It is understood that both the platforms — Swiggy and Zomato are likely to contest the demand as they are currently in talks with the GST Authorities explaining their point of view,” sources shared.

According to the industry, an ideal solution to deal with this issue for the Council would be to make a change saying that food platforms have to pay GST on these charges (just likely food bill) at 5%. This was in Council's agenda earlier, but no decision was taken in this regard. The industry hopes that this change would be made prospectively.

CNBC-TV18 reached out to the food delivery companies for a reaction on this issue. Both Swiggy and Zomato are yet to share any comments.

Experts say that a clarity is much needed as a similar view has been taken by the authorities in many other cases, which is leading to confusion and litigation.

Saurabh Agarwal, Partner, EY says, “The taxation of delivery charges by food delivery platforms remains a source of ongoing debate. The platforms do not impose any GST on delivery charges, as they view them simply as the costs incurred by the riders who transport food orders to customers' doorsteps and collect these costs from customers and transfer them to the riders. However, tax authorities regard these charges as part of the platforms' revenue and insist on the collection of GST on them. The delivery charges may not be classified as revenue of the food delivery platform, as the riders are not employees of the platform but rather independent contractors and collect these charges on their behalf."

"The application of GST on delivery charges would significantly affect the cash flow of the food delivery platform. Therefore, it is essential for the GST council to issue clear guidelines regarding the treatment of delivery charges, similar to the clarification they have provided regarding the inclusion of electricity charges," he added.

Abhishek A Rastogi, founder of Rastogi Chambers, who is also arguing for similar nature of controversy for credit card industry said, “GST is applicable on a supply of service by the service provider, and when a person merely collects the consideration for another service provider, such a person may not become a service provider. This happens in several industries including the banking sector and hence the contractual arrangement is an essential ingredient to test whether the person will fall within the definition of the service provider."

"The courts in several cases have gone into the concept of double taxation and directed for examination of the tax leakage. However, in the instant case, the exemption limits will kick in and perhaps there is no leakage of revenue,” he added.

MS Mani, Partner at Deloitte too feels, "it is essential to have a clarification on the applicability of GST on services provided by gig workers as the platforms only facilitate such services. Any clarification on the subject should be made effective on a prospective basis only."

To watch out for is how Swiggy and Zomato react to the development and whether the matter gets presented in front of the judicial authorities to find a way out