The GST Council, which is headed by the Union Finance Minister and includes representatives from all states and Union territories, has approved a proposal to make food delivery platforms like Zomato and Swiggy responsible for collecting and depositing the 5% GST (Goods and Services Tax) applicable to food with the government, effective January 1, 2022. Finance Minister Nirmala Sitharaman made the announcement on Friday, 17 September, after the meeting of the GST Council in Lucknow. To make tax administration easier, the Council has taken this decision.
- What happens once it comes into effect?
- What does it mean for customers?
- How does it have a huge impact on restaurants and food delivery apps?
- How to overcome this influencing decision?
What happens once it comes into effect?
Currently, if a customer orders food, for example, from Restaurant ‘A’ using Swiggy or Zomato, the food delivery platform collects the 5% tax on food from the customer and passes it on to the restaurant. However, the government believes several restaurants have not deposited their taxes even though they experienced high turnover. Accordingly, beginning January 1, 2022, food delivery apps will collect the tax on behalf of restaurants and deposit it on their behalf. Consequently, restaurants will also need to register themselves, just as e-commerce sellers do.
In its 45th meeting, the GST council also pegged on the need to bring delivery services under taxation. But it determined that since the customer does not directly avail of the services of a delivery agent, nor do they have the choice of which delivery agent services or delivers them, the responsibility for paying the tax on delivery services will lie with the food delivery apps.
What does it mean for customers?
Revenue Secretary Tarun Bajaj has stated that customers will not be adversely affected by this change. According to him, no new taxes are being levied, but the GST collection point is being moved. The customers will continue to pay the 5% rate on the food they order online.
How does it have a huge impact on restaurants and food delivery apps?
It seems likely that the most significant impact will be on smaller restaurants and cloud kitchens, particularly those with an annual turnover of less than INR 20 lakhs, since they weren’t previously included in the GST net. Combined with the responsibility for collecting taxes resting with the aggregator, these smaller restaurants will also be required to pay taxes.
Restaurants, however, will have an added compliance burden as they will have to keep two separate books of account: one for the regular business they do, and a second for the part they do with Zomato or Swiggy. In addition, this will also increase the burdens on the aggregators for collecting and accounting for taxes on behalf of the restaurants. Moreover, the switch could create confusion over the application of input tax credits, for which food aggregators are likely to ask for clarifications.
In Tarun Bajaj’s view, the decision was made to prevent “revenue leakage” by unregistered restaurants. According to the analysis of tax returns filed by food delivery apps and a few Haryana restaurant services, there is a large gap in taxable turnover for suppliers, seemingly indicative of tax evasion among some restaurants. In the study, the TCS deducted by a delivery app was more than the turnover revealed by these suppliers.
How to overcome this influencing decision?
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