Zomato, India’s leading foodtech giant, confronts fresh tax obstacles as tax authorities issue a notice of INR 4.2 Cr, alleging an underpayment of goods and services tax (GST). This development closely follows a substantial INR 401.7 Cr show-cause notice from the Directorate General of GST Intelligence, Pune Zonal Unit, relating to unpaid taxes on delivery charges. Zomato faces deepening financial challenges amid these taxing circumstances.
Notice Particulars and Company Response
Zomato has been served three orders from the Sales Tax Officer, Ward 300, Delhi, and Deputy Commissioner, DGSTO-4, Bengaluru, Karnataka. These orders claim a GST payment shortfall, coupled with relevant interest and penalties under various tax acts, amounting to INR 4.24 Cr. Responding to this, Zomato stated in an exchange filing that it firmly believes it has a compelling case. The company plans to appeal these orders before the appropriate appellate authorities. The notice adds to the ongoing hurdles for Zomato in a highly competitive and evolving market.
Despite the taxing challenges, Zomato’s shares commenced at INR 124.65 per share during the Monday session, reflecting a 0.77% increase from the previous close at INR 123.7. The market’s response indicates that investors are vigilantly monitoring the situation, considering both the financial implications and Zomato’s strategic responses.
Zomato: Broader Tax Scrutiny in the Industry
This recent tax notice further intensifies the scrutiny faced by Zomato and its competitor Swiggy. Reports suggest that both platforms have received notices for a cumulative GST worth INR 1,000 Cr, with tax authorities categorizing delivery charges as revenue. The evolving tax landscape presents challenges for these food delivery giants, necessitating a reassessment of financial models and navigation through dynamic regulatory frameworks.
Zomato: Evolution of GST on Food Delivery Platforms
The inclusion of ‘restaurant services’ and cloud kitchens under Section 9(5) of the CGST Act, 2017, marked a pivotal shift in the taxation of services offered by platforms like Zomato and Swiggy. While ‘restaurant services’ incurred a 5% GST, uncertainties lingered regarding the taxation of delivery services and associated fees.
The ongoing discourse surrounding delivery fees charged by Zomato and Swiggy has persisted since 2016. Both platforms introduced these charges, subsequently evolving their models with loyalty programs like Zomato Gold and Swiggy One, offering subscription plans to offset delivery fees. The potential introduction of a new GST could impact the cash flow of these platforms, introducing complexity to their revenue models.
Zomato’s Financial Resilience
Despite the taxing challenges, Zomato reported its second consecutive profitable quarter, with a profit after tax surging to INR 36 Cr during the September quarter of the financial year 2023-24. This substantial increase represents an 18X jump from the preceding quarter’s PAT of INR 2 Cr. Zomato’s ability to sustain profitability amid tax scrutiny underscores its resilience in navigating dynamic market conditions.
Zomato’s recent GST demand notice highlights the ongoing challenges faced by the foodtech giant within a complex regulatory landscape. As the industry awaits the company’s appeals and responses, the evolving tax environment for food delivery platforms remains a critical factor shaping their financial strategies and market performance in the coming months.
