Zomato Shares Open Flat as Tax Authorities Issue Notice to Food Delivery Firms

SA TeamNovember 28, 2023

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Three points you will get to know in this article:

Zomato and Swiggy face INR 1,000 Cr GST on delivery charges, but still deliver 2 Mn orders daily and charge platform fee.
Zomato Q2 FY24 profit INR 36 Cr, up from Q1.
GST on delivery charges for Zomato and Swiggy, still 2 Mn orders and platform fee.

Zomato’s stocks had an uneventful start on Thursday (November 23) amid reports of tax notices served to both Zomato and Swiggy for alleged non-payment issues in the realm of food delivery aggregation. Closing at INR 115.25 on the preceding day (November 22), Zomato’s shares exhibited a neutral performance. By 9:20 am on November 23, the stock was marked at INR 114.

GST on Restaurant Services

Notably, in January 2022, the Central Government expanded the scope of Section 9(5) of the CGST Act, 2017, to include ‘restaurant services’ and cloud kitchens. This policy adjustment mandated entities like Swiggy and Zomato to adhere to a 5% GST on the ‘restaurant services’ they provide.

Tax Authorities Demand INR 1,000 Cr from the Platforms

Zomato and Swiggy, the dynamic duo, are said to have recently found themselves in the spotlight, receiving notices for a combined goods and services tax (GST) amounting to approximately INR 1,000 Cr. The tax authorities have taken a fresh perspective, now considering the delivery charges amassed by these platforms as part of their revenue.

The mandate from tax officials requires both food delivery giants to settle a sum of INR 500 Cr each. This represents the 18% tax imposed on the total delivery fees they have accumulated since embarking on their food delivery ventures.

Delivery Fees and Loyalty Programs

The ongoing debate surrounding the consistent delivery fees imposed by Swiggy and Zomato has stirred controversy, eliciting diverse opinions on the matter. Back in 2016, Swiggy kickstarted the trend of applying food delivery fees. Soon after, Zomato hopped on the bandwagon and implemented their own delivery charges.

After establishing a standard for these fees, Zomato rolled out a loyalty program that we now know as Zomato Gold. This fantastic initiative empowers customers to dodge delivery fees by opting for a convenient monthly plan, packed with some extra goodies. Following a similar path, Swiggy introduced Swiggy One, embracing the idea of waving goodbye to delivery fees through a subscription model, coupled with some sweet additional perks.

Impact on the Platforms’ Performance and Cash Flow

Zomato and Swiggy efficiently handle a staggering 1.8 to 2 million orders daily nationwide. The prospect of a fresh Goods and Services Tax (GST) being introduced looms, casting potential disruptions on their financial streams.

In response, both platforms have initiated a platform fee structure for orders, ranging from INR 2 to INR 5 per order. Noteworthy is that this fee is uniformly applicable to all customers, regardless of their participation in any specific loyalty program.

On another note, Zomato celebrated its second consecutive profitable quarter, witnessing a remarkable surge in profit after tax, soaring to INR 36 Cr in the September quarter of the financial year 2023-24 (FY24). This marked an impressive 18-fold increase from the preceding quarter’s PAT of INR 2 Cr.

Zomato and Swiggy have received tax notices for non-payment of Goods and Services Tax (GST) on delivery charges, totaling around INR 1,000 Cr. The tax authorities now consider the delivery charges as part of the platforms’ revenue. Despite this, Zomato reported its second consecutive profitable quarter, with a significant surge in profit after tax to INR 36 Cr in the September quarter of FY24. Both platforms have introduced a platform fee on orders, potentially affecting their cash flow amidst delivering 1.8 Mn to 2 Mn orders daily.