The COVID-19 pandemic led to a significant increase in demand for doorstep delivery services, particularly for food and groceries, in India. Recent reports by Finshots and Businesswire indicate that the total online food/grocery delivery sales in India has already reached $4.98 billion in 2021, and it is estimated to rise exponentially, reaching $38.83 billion by 2023.
Impact of Delivery and Surge Charges on Online Delivery Services
Food delivery aggregators, such as Zomato, have significantly increased the utility of online delivery services in India. However, customers have to pay delivery and surge charges on all orders, which can be significant, and sometimes even higher than the item value. These charges are not always included in the tax bill issued to the customer. This raises questions about the rationale for excluding delivery charges from taxation.
Taxation of Online Delivery Services
Up until the 45th GST Council Meeting in September 2021, restaurants had to pay a 5% Goods & Services Tax (GST) on their services without being able to claim any input tax credit. However, after the Council meeting, it was clarified that the delivery of food through take-away and door delivery services was considered as restaurant services, and they would attract 5% GST without any input tax credit.
Tax Liability of Food Delivery Aggregators
With the introduction of food delivery apps, customers no longer have to pay tax on delivery services; The responsibility for that now lies solely with the apps. Before this, it was up to the food delivery services to collect tax from customers and pass it on to restaurants. Despite the official reports, there was an inconsistency between the real revenue & the amount reported to the government. To tackle this issue without affecting customers, the 45th GST Council worked towards minimizing tax leakage in regards to food supplies.
Challenges in Implementing Tax on Delivery Services
Online food delivery aggregators were registered as tax collectors at source, allowing them to collect tax from restaurants. The 45th GST Council identified a gap in the taxable earnings due to many restaurants providing services through delivery platforms that were not registered for GST. To make up for this, it has been decided to implement taxes on restaurant services supplied through e-commerce operators from 2022. The new tax bill has an effect on the tips & surge/delivery charges applicable on food delivery aggregators. These delivery charges are treated as tips and thus, exempt from the GST tax. Customer paid tips are also not liable to GST as there is no business activity related to it.
Also Read: The Impact of GST Increase on SMEs in Singapore: Despite Challenges, Optimism Remains
The Rationale for Exemption from GST for Delivery Services
The idea to exempt delivery services valued below Rs 20 lakhs from GST is a reasonable one. But, it needs to be seen whether the ultimate aim of “pass-through” from customer to delivery partner is being fully realized or not. Policymakers may have deliberately decided not to bring delivery charges under the ambit of taxation, considering the labour and employment issues for low-paid workers. However, the government may have to decide on this issue someday as consumers bear the soaring costs while aggregators profit from it.
