By going to your favorite restaurant, you can get a sense of how the food industry is changing. A swarm of people wearing orange or red t-shirts would be chattering and waiting at the door. This is a common sight in almost all major restaurants in India, big or small. This is an excellent opportunity to gain firsthand knowledge of the market disruption caused by food delivery startups. But, is the sector growing exponentially as a result of instant deliveries by gig economy workers?

According to an advisory issued by the Goods and Services Tax Network ("GSTN") on July 20, 2022, E-Commerce Operators ("ECO") are required to pay GST on specified supplies of services under Section 9(5) of the Central Goods and Services Tax Act, 2017 ("the CGST Act"), namely Passenger Transportation Services, Accommodation Services, House Keeping Services, and, more specifically, Restaurant Services, and all provisions of the CGST Act shall apply to such ECO as if he is the supplier liable Previously, restaurants were required to pay GST on their restaurant services; however, beginning January 1, 2022, GST on restaurant services supplied through the ECO, such as Zomato and Swiggy, will be paid in cash by the ECO at a rate of 5%, with no Input Tax Credit ("ITC") available on such supplies, regardless of whether the restaurant is registered or not.

Reduction in Goods and Services Tax (GST) rates and Input Tax Credit (ITC) withdrawal

GST rates for eating establishments were recently reduced. This created quite a commotion. The previous 18% GST rate was reduced to 5%. This decision, however, was made concurrently with the decision to withdraw the input tax credit for the provision of these services. Input tax credit refers to GST paid on raw materials or purchases that can be deducted from future tax liability of a specific type. Because of this decision, restaurants have raised their prices on online food delivery platforms such as Zomato, Swiggy, and Foodpanda. Some restaurants, on the other hand, have chosen to cut commissions with their online food delivery partners.

The increased prices may have a significant impact on the growth of online food delivery services.

There are approximately 100,000 registered restaurants on food delivery platforms. Digital payments account for approximately 70% of all orders placed on these platforms. This is an excellent enabler for the government's digital payment campaign. A lower GST rate will go a long way toward promoting the digital campaign.

GST collection point modification

Meanwhile, at the 45th GST Council Meeting on September 17, 2021, the GST Council declared that cloud kitchens and food delivery platforms such as Zomato, Swiggy, Foodpanda, and others would be charged GST at a rate of 5% beginning January 1, 2022.
Finance Minister Nirmala Sitharaman said, "Food delivery operators like Swiggy that collect orders from restaurants and deliver (to customers) the point at which the tax will be collected by gig group Swiggy and others."

The GST Fitment Committee recommended to the Council that e-commerce operators (ECOs) be bound to pay GST on restaurant services offered through them. Previously, such food delivery platforms collected GST from customers and returned it to the restaurant. Restaurants listed on food delivery apps pay a 5% GST on the food bill. Food delivery aggregators charge restaurants commissions for delivery and marketing services, which are subject to 18% GST. Restaurants were supposed to pay the GST collected by food delivery platforms to the government after receiving it. Food delivery platforms were also tasked with collecting TCS (Tax Collected at Source) at a rate of 1% on the taxable value of supplies made by restaurants via them.

The existing system was perplexing and resulted in tax evasion. The Department discovered significant discrepancies between the taxable value reported by Food Delivery platforms in TCS returns and the taxable value of supplies reported by restaurants in the returns. The tax collected by food delivery platforms would not be deposited with the government by restaurants.

Food delivery companies will now collect tax from customers and deposit it directly with the government on behalf of the restaurants.

Although some cons and concerns have arisen as a result of this new direction, there are some long and short term benefits to this direction.

Here are some examples:

Reduce Revenue Leakage:

There were some loopholes in the previous setup that resulted in revenue leakage to the government. There is now a much lower chance of revenue leakage with this new direction or setup.

Improve transparency:

There was always some concern about transparency regarding the collection and submission of levied taxes in the current setup due to some loopholes; however, there is no such concern in the current setup. Experts believe that with this new direction, transparency will increase in the near future.

Increase revenue:

Sealing the leaks and increasing transparency in the system will result in more revenue collected.

Taxation that is reasonable:

Small restaurants are generally exempt from the net GST bracket for ordinary businesses; however, when they conduct business through these online platforms, the customer is required to pay the GST to these small restaurants at the current rate. These restaurants will not display them and will keep them to themselves. These systems will not work in this new direction and transparency, and tax revenue will go to the government treasury rather than any business owner.

Improve online food delivery service compliance:

New regulations impose additional revenue collection compliance on these online food delivery services, providing an additional layer of protection against revenue leakage.

This new GST rule will affect small restaurants, particularly those with an annual turnover of less than Rs 20 lakh, as these restaurants were previously exempt from GST registration. As a result of this decision, restaurants, like other e-commerce sellers, will be required to register.

Furthermore, most restaurants will face an additional compliance burden as a result of this new rule, as they will be required to maintain two separate accounts — one for their regular business and the second for business done through Zomato or Swiggy. According to tax experts, the way the GST framework works may cause some of the smaller restaurants' costs to rise in the future.

Restaurants pay 5% GST under current regulations, but they do not receive an input tax credit for it. Currently, some smaller restaurants and cloud kitchens do not pay GST. The new GST regulations, on the other hand, may force them to pay taxes. These small restaurants are concerned that they will have to raise their prices, which will reduce their demand.

Conclusion

A government official said, “These online food delivery companies have represented for reduction in rate or for allowing IT to restaurants.” The situation is being discussed." We see that, while the government mulls over the recall of the ITC limit provision for restaurant owners under GST, the current situation has forced restaurant chain owners and franchise partners to start over. The GST Council proposed bringing delivery services into the tax net as well, but it determined that because the customer does not directly use the services of a delivery executive therefore has no choice in which delivery executive services them, the liability for paying the tax on delivery services will fall on the food-delivery apps. The GST Council has stated that food delivery platforms such as Swiggy and Zomato, like restaurants, should pay 5% GST. The platform tax will go into effect in January of next year. Companies, according to those who are aware of the developments, are concerned about the way the tax system operates; they may see an increase in their total costs.