Why GST authorities sent show cause notice of Rs 401.7 crore to Zomato

On December 26, the Directorate General of GST Intelligence, Pune Zonal Unit, issued a show cause notice to foodtech giant Zomato, demanding an explanation for an alleged tax liability of Rs 401.70 crore for the period between October 2019 and March 2022

According to the reports, The authorities claim that delivery charges that are collected from the customers are subject to GST.

Zomato's response

In response, Zomato said that it is not liable for this tax. The foodtech giant said that the delivery charges are collected on behalf of the delivery partners, not as a revenue for Zomato itself.

According to the company, the delivery partners are the ones providing services to the customers, and therefore, the company should not be taxed for these charges. Notably, the company's response is supported by opinions from external legal and tax advisors.

"The Company strongly believes that it is not liable to pay any tax since the delivery charge is collected by the Company on behalf of the delivery partners. Further, in view of the contractual terms and conditions mutually agreed upon, the delivery partners have provided the delivery services to the customers and not the Company," the company informed in an exchange filing.

What prompted the issue?

The crux of the issue lies in the interpretation of GST regulations. In January 2022, a change in GST rules mandated food delivery platforms like Zomato to pay 5% GST on restaurant services.

However, these changes did not explicitly address the treatment of delivery charges. This ambiguity has led to the current dispute between Zomato and the GST authorities.

What Zomato is planning?

Zomato plans to file a comprehensive response to the show cause notice, expressing confidence in the merit of its case. The company's stance is that it has not violated any tax laws and is not liable for the alleged tax demand.

It's worth mentioning that the issue is not unique to Zomato; its rival Swiggy faced a similar notice months earlier. Both companies are now seeking clarity from the Centre on the applicability of GST on delivery fees.

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