Online food delivery firms face GST heat from restaurants

Online food delivery service companies like Swiggy are facing the heat from restaurants after the goods and services tax (GST) on eating outlets was cut to five per cent, from 18 per cent in November, and input tax credit provision was withdrawn.

Some restaurants have started charging higher prices on online food delivery platforms. Others are negotiating a commission cut with online food delivery partners to make up for the 3.5 per cent additional cost due to unavailability of the input tax credit (ITC) facility.

Swiggy, Zomato and Foodpanda provide online delivery services to restaurants at a commission of around 20 per cent, which is levied an 18 per cent GST. Unlike earlier, restaurants can no longer claim ITC on the 18 per cent GST for the input services from these delivery platforms. “These online food delivery companies have represented for a rate reduction or to allow ITC to restaurants. The matter is being discussed," said a government official.

Swiggy, which holds about 60 per cent market share and delivers 450,000 orders a day, has approached the government for rate reduction to five per cent. Food delivery services are taxed at 18 per cent, which the restaurants have to pay. But, they cannot now avail of any tax credit against input services.

A senior executive of a major online food delivery player said they had been under pressure from restaurants to cut margins by three to four per cent. He added other restaurants had, on their own, increased the prices on their platform. “We do not have an exact number but many restaurants are slowly increasing the prices on online delivery platforms, which is a setback,” he added.

Swiggy told Business Standard, “The high GST rate of 18 per cent on online food delivery service providers and ineligibility of credit of such GST charged to the restaurants could have an adverse impact on growth of the sector.” A reduction in GST rates will keep food costs affordable and create more jobs in the sector, while furthering the government’s initiatives on Digital India, it added

Queries to Zomato remained unanswered.

A little more than 100,000 restaurants have partnered with these online food delivery service providers and around 70 per cent of orders on these platforms are through digital payments, according to an industry study shared with the government.

“Specific to the restaurant sector, as no ITC is allowed, any GST paid is a cost, which would influence restaurants to avoid incurring such expenses, attracting high GST. The only way to encourage use of technology and to incentivise restaurants to use online delivery partners is by reducing the GST rate, which would aid to the growth of this theme” said Kunal Wadhwa, partner — indirect tax, PwC India

Riyaaz Amlani, chief executive officer of Impresario Entertainment & Hospitality and immediate past-president of NRAI said they couldn’t claim ITC on delivery charges they paid to online delivery service firms like Zomato and Swiggy, which is a pain point.

According to a top executive of a popular multinational fast-food chain, the matter should get resolved soon. "Paying 18 per cent GST on deliveries and other heads without ITC is not feasible. Else, one would have to hike prices on the menu," he added.

Abolition of ITC has raised concern about the growth and opening of new franchise outlets. This has led restaurant chain owners and franchise partners to go back to the drawing board.

By sector estimates, opening of new restaurants could go down by 10-15 per cent due to higher set-up costs. While consumers are charged five per cent GST on food bills, the GST on royalty and franchise fee is 18 per cent.

“This has impacted growth plans. We see an impact on opening of new restaurants due to this,” said Karan Tanna, founder and chief executive at Yellow Tie Hospitality, a franchise management company operating in the food and beverage sector.

The ~200-billion restaurant chain sector is currently growing at 22 per cent annually.