By S. Abhipsha Dash
The Current Issue:
Food delivery giant Zomato finds itself in a hot-and-spicy dispute with the Indian Government over a seemingly mundane topic: The Goods and Services Tax (GST) on delivery fees. The seemingly mundane topic which started in late 2023, no matter how much mundane it seems in the first instance possesses the potential to significantly affect the landscape of online food ordering and raise crucial questions about taxations in gig economy.
The bite of the matter:
At the heart of the issue lies the question of whether delivery fees charged by Zomato will qualify as “revenue” or simply as a collection on behalf of the delivery partners. The GST authorities contending the former slapped a hefty notice of 402 crore notice for unpaid tax on past delivery fees.[1]
Zomato however takes a different bite out of apple. They claim that delivery fee is just a pass-through collected from customers for their delivery partners and is directly transferred to them. They say that taxing these will put an unnecessary burden on both the platform and its delivery personnel. This opens up a pandora box of several legal implications which will be discussed through the article.
Classification of delivery fees:
The government authorities contend that delivery fees is a part of Zomato’s revenue and hence making it liable for 18% GST. Their argument is premised on the claim that Zomato controls the entire service chain, including delivery and hence benefits from that view. Their argument is further strengthened by the recent case of Dream11 where the case was centered around the question involving the levy of GST on e-commerce delivery platform’s collection of service tax from their sellers. The court uphold the tax by saying that the Dreamline controlled the delivery services and also earned revenue out of it.
But Zomato claims their delivery partners who constitute a major part of the gig-economy task force as agents and the revenue collected is directly transferred to them. It claims that it merely acts an agent for independent riders, collecting fees on their behalf and transferring it directly. They are not providing the delivery service themselves. This argument leads us to take a closer look on the 2020 case of Uber India Systems Pvt. Ltd. v. UOI can be taken where question was raised although not on delivery fees but on the driver incentives paid by Uber and held that Uber acts as an aggregator platform linking drivers and passengers. But then the court also held that Uber controlled the service chain and also benefited from the revenue collected hence the levy of GST was held to be valid.
Applicability of gst to gig economy:
The current GST Act of 2017 lacks clarity on how to handle transaction involving service platforms and independent contractors. Defining nature of transactions remains a challenge, whether Zomato’s delivery fee is part of its revenue or simply a pass-through cost still looms in the mind of tax authorities. The act defines “supply” broadly encompassing any transfer of goods or services in exchange of consideration. Determining the location of a service is deemed to be supplied for tax purposes can be tricky especially in today’s digital age. For businesses like Zomato where transaction often cross geographical boundaries, pinpointing the place of supply is crucial for applying GST tax. Since the act has vague provisions regarding this, it can lead to conflicting areas.
In the case of AAR Ruling in Re: M/s UrbanClap Technologies India Pvt. Ltd. it was held that commission (collected by UrbanClap from service providers) was not subject to GST as UrbanClap acted as an agent, collecting payment on behalf of its providers.
Constitutional challenges:
The issue of “Double taxation” comes into picture. Zomato can raise the claim of double taxation. Taxing their original income and then afterwards taxing delivery revenue will ultimately lead to taxing the same income twice. On top of the food prices they charge patrons, restaurants already pay 5% or 18% GST. The entire food preparation and supply service is covered by this tax. Zomato levies an additional delivery cost that the government intends to tax at an 18% percent. According to this argument, taxing the delivery fee amounts to taxing the same income (the service of delivering the meal to the consumer) twice: once via the restaurant's GST and once on the delivery fee itself. Consumers ultimately bear the brunt of the double taxation since they are required to pay the GST on both the meal and the delivery service.
On the other hand, the government may contend that delivery services and restaurant services are two different things. Restaurants create and cook the food; Zomato takes care of the infrastructure and logistics to deliver it to the customer. These are viewed as distinct value additions, which support distinct taxation. Since, the government controls the delivery process and benefits from higher costs with increased orders, they may also argue that Zomato's revenue comes from the delivery fee. In this opinion, Zomato's revenue should be taxed as the fee.
The legal implication of these concerns can be varied. Under Article 265 of the Indian Constitution, which forbids paying more than one tax on the same transaction, Zomato may contest the validity of double taxation. To ascertain whether charging a delivery fee amounts to double taxation on the same service, courts must carefully read the GST Act and its intent.
Future implications:
1. Taxation of platform based service models:
The court’s decision in the particular case will set a precedent for how similar platform -based business, like e-commerce aggregators and cab services are taxed. This might make the implementation of GST clearer and more guided, or it could open the door for changes to close any loopholes in the current legal system.
Income against Pass-Through Expenses: Platform fees' classification as income or pass-through expenses will directly affect these companies' tax obligations. If Zomato wins, similar platforms may have less tax liability; if Zomato loses, however, costs may increase and pricing strategies may need to be adjusted.
2. Designation as an Employee vs. Independent Contractor:
Benefits and Worker Status: How the court views Zomato's collaboration with delivery partners may have an impact on the current discussion about whether gig workers should be classified as independent contractors or employees. Thus, gig workers' ability to obtain social security benefits, protection from minimum wage increases, and other rights are impacted.
Platform Responsibilities: Depending on the outcome, platforms may be forced to pay more taxes or contribute to their partner workers' social security benefits. This would change the nature of their business models and possibly lessen the allure of gig economy employment for both platforms and workers.
3. The gig economy's expansion and sustainability:
Financial viability: Raising operational expenses for platforms due to altered worker classification or increased tax obligations may result in lower worker revenue or higher service prices. This might have an effect on the gig economy's viability and affordability for both users and contributors.
Platform Consolidation: A convoluted and onerous regulatory framework may deter new players and cause the platform economy to consolidate, hence reducing competition and service variety.
4. Policy Development and the Regulatory Framework:
Policy Defining and Adaptability: The decision of the court will identify specific areas in which the existing legal framework about the gig economy may require clarification or amendment. The swift evolution of this economic model may compel policymakers to modify current legislation or devise novel regulations to tackle the distinct obstacles and prospects it presents.
Concerns concerning worker welfare and monetary stability in the gig economy may become more prominent as a result of the Zomato case receiving more media attention. This may prompt policy modifications meant to guarantee gig workers equal opportunity and access to necessary benefits.
Conclusion:
The socio-legal implications surrounding the issue is multifaceted. The last course on this table will probably be served by the courts, as Zomato has already filed legal objections. Their decision would not only set Zomato's and its competitors' tax burdens but also crucial rules for implementing the Goods and Services Tax in the developing gig economy. Classification of work, worker and nature of supply will provide an impetus to better clarify the questions raised by tax authorities.
This case goes beyond just percentages and rupees. It symbolizes a larger conflict between traditional taxation structures and the emerging digital economy that depends on independent contractors. The most suitable solution can be to walk a middle way to balance the tax norms and provide the gig economy workers with a sense of security towards their source of income
Keep in mind the simmering pot of GST that is bubbling in the background the next time you enjoy a hot delivery. The flavour of food ordered online may depend on Zomato's decision regarding delivery costs and further affect gig economy for years to come.
The author of this article is S Abhipsha Dash.
[1] Food Fight: Zomato may be looking at minimum 3 yrs of litigation over Rs 400 crore GST notice, say experts, https://www.moneycontrol.com/news/trends/legal/food-fight-zomato-may-be-looking-at-minimum-3-yrs-of-litigation-over-rs-400-crore-gst-notice-say-experts-11976531.html.
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Insightful! Definitely made me know about the intricacies of the current legal issue involving an app which makes people's life easy and quick!