Goods and Services Tax (GST) on Online Food Delivery Websites 08/07/18, 1(10 AM

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Goods and Services Tax (GST) on Online Food Delivery Websites

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1. Background

Not so long ago in order to have a & Latest Posts

one off scrumptious meal,
ordinary citizen was required to go
through the travails of
inordinately long distance to an
upmarket restaurant and satiate
one’s palate. On the downside,
however, this would entail one to
have deep pockets and would limit
such visits to only a couple in a
month. Recognizing the dearth of
time in people’s lives and their urge to have everything readily delivered to them, the
young Indian entrepreneurial minds tapped into a market segment that had high
risks coupled with higher rewards. This sector was ‘Food Delivery’.
This Article aims at analysing the business models of such food delivery startups
and how Goods and Services Tax (‘GST’) will have an impact on their operations,
margins and compliances.
2. Prevalent Business Models
Startups (‘websites’) engaged in food delivery sector can prima facie be divided in
two models based on their service offerings:
2.1 Pick and Deliver (‘Marketplace Model’)
an
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Goods and Services Tax (GST) on Online Food Delivery Websites 08/07/18, 1(10 AM

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2.1.1 The website operates through a mobile appthat depicts menus of different insurance.html)
restaurants. Exampleof such websites are Swiggy, JustEat, TinyOwl etc. 3. Most Popular Exempt Allowances for
Salaried Employees
2.1.2 The website has tie ups with different restaurants and offers its services of food (https://taxguru.in/income-tax/most-
delivery. The customer orders food on the website and makes the payment either popular-exempt-allowances-for-salaried-
employees.html)
through credit/debit card or in cash on delivery. The payments are collected by the
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website.
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2.1.3 The website charges commission ranging from 7.5% to 20% from restaurants (https://taxguru.in/income-tax/must-
have-components-in-your-salary-to-
for getting them orders and also charges commission to list them on its website.
minimise-tax-burden-for-financial-year-
2.1.4 At the end of the month/week, the website, after deducting its commission, 2010-11.html)

makes net payment to the restaurant for food sold via its website. 5. Income Tax treatment of Gratuity
(https://taxguru.in/income-tax/tax-
2.1.5 Currently,the website charges Service tax from restaurants on its commission. treatment-of-gratuity-under-the-income-
tax-act-1961.html)
2.2 Cook and Deliver
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2.2.1 The website operates through an app which shows its own food menu. The
website operates solely on delivery model and has nodine-in facility. Example of
such websites are Batman Delivers, Yumist, FreshMenu, Madbites etc.

2.2.2 The website charges for food (and sometimes for delivery).

2.2.3 Currently, the website charges Value Added Tax (‘VAT’) on sale of foodto its
customers. There is no Service tax on food outlets purely into delivery without any
dine-in facility.

3. Impact of GST

3.1 If we have a look at the ‘Marketplace Model’, the website is solely providing
service of food delivery from listed restaurants to customers premises. The different
legs of transaction have been analysed hereunder:

Transaction Current Indirect Tax Under GST structure

structure

Between ♣ Service Tax levied on ♣ Introduction of the concept of ‘supply’ that

Restaurant commission charged by includes sale, barter, exchange, license, rental
& Website the website. etc of goods and servives; ⋆ Featured Posts

1. Life Insurance Premium- Tax benefit on

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Goods and Services Tax (GST) on Online Food Delivery Websites 08/07/18, 1(10 AM

♣ Commission charged from the restaurant is a Payment and Maturity

supply of service, subject to GST;
♣ One area of concern is whether supply of food
from restaurant to the website (for delivery to
customer) shall also be considered as a supply,
subject to GST. This view emerges from a
combined reading of the term ‘agent’ that is inter
alia defined to include a person who supplies or
receives goods on behalf of another and the term
‘supply’ that includes transactions between a
principal and an agent and the term ‘supplier’
that means any person supplying goods/services
and includes an agent acting on behalf of such
supplier in relation to the goods and services.
♣ This further gets strenghtened by reading the
Schedule I of the Model GST Law, where supply
of goods without consideration by a taxable
person to another taxable/ non-taxable person in
the course or furtherance of business are
deemed to be a ‘supply’.
♣ Basis the above, a view emerges that
transaction of handing over (supply) of food by
the restaurant to the website (even though the
website acts as an agent) may be subject to
GST.
♣ Although, the above view seems visible upon
reading the provisions of the Model GST law, any
such interpretation shall make the concept of
agent redundant and the concept of GST flawed.
Between ♣ The website may ♣ As discussed above, transaction between the
Website & charge a consideration for website and the customer may get covered as a
Customer delivery of food to the supply, subject to GST. However, this issue is
customer on which subject to clarification from the Government.
Service tax may apply.
10. Creation of HUF – Tax Planning
Between ♣ The restaurant charges ♣ In an ideal scenario, the restaurant should
Customer VAT and Service tax (in charge GST on sale of food, to be collected by
& some cases) on sale of the website for onward transfer to the restaurant.
Restaurant food.
Similarly, commission earned by the website
should be subject to GST.
♣ Other than the above, there should be no tax
implications under this model.
* NEWSLETTER
3.1.1. Further, should the transaction of delivery of food from the restaurant to the
website be considered a supply, there are different challenges to be managed.
Currently, restaurant raises invoice to the customer. Under GST the restaurant may
have to raise the invoice in the name of website so that the latter is able to avail
credit of tax paid. Further, the website will raise invoice on the customer. This will
also cause issues around valuation considering a principal-agent relationship
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3.2 Now, moving towards the ‘Cook and Deliver’ business model, complications
faced by websites under this model will be less in comparison to the Marketplace
Model. As per Schedule II of the Model GST Law, the activity of Cook and Delivery
shall be a ‘deemed supply of service’. Thus, supply of food to customers under this
model should be subject to GST.

3.2.1 The Cook and Deliver Model shall face a significant benefit in the form of
reduction in its costs. Under the current tax regime, service tax paid on input
services that are utilised by the website is treated as a cost. This is because the
website is engaged purely in sale of food (goods), thus, having only VAT liability and
no Service Tax liability. Under the GST regime, input tax paid by the website shall be
available as credit (‘ITC’), hence, reducing their cost burden.

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Goods and Services Tax (GST) on Online Food Delivery Websites 08/07/18, 1(10 AM

3.2.2 Place of Supply – How Will Food Delivery websites get affected

However, a complexity will be faced when any website supplies food from one state
to the other. Though, this may seem a distant possibility but for delivery websites
based in places like Gurgaon and delivering in Delhi may still be a case. Some
lucidity may be expected on this particular issue in the final law, but under the
provisions of Model GST Law, as per Section 6 of the Integrated GST (‘IGST’) Act,
which elaborates upon place of supply (‘POS’) under different scenarios, POS in
case of such supply may fall under sub-section (1), (2) or (5). The relevant verbatim
of the law has been stated herunder:

‘(2) The place of supply of services, except the services specified in sub-
sections (4), (5), (6), (7), (8), (9), (10), (11), (12), (13), (14) and (15), made to a
registered person shall be the location of such person.

(3) The place of supply of services, except the services specified in sub-sections
(4), (5), (6), (7), (8), (9), (10), (11), (12), (13), (14) and (15), made to any person
other than a registered person shall be (i) the location of the recipient where the
address on record exists, and (ii) the location of the supplier of services in other
cases.

(5) The place of supply of restaurant and catering services, personal grooming,
fitness, beauty treatment, health service including cosmetic and plastic surgery
shall be the location where the services are actually performed.’

3.2.3 In view of the aforementioned provisions, the Cook and Deliver Model may get
covered under sub-section (5) if such food delivery websites get covered as a
‘restaurant’. Under the current tax regime and under the Model GST Law, there is no
such inclusion. This takes us to the general provisions, viz, sub-sections (2) and (3).
It can be construed that in either case, such supply shall be covered as inter-state
supply, subject to IGST. Resultantly, this will have added compliance burden on the
website such as compulsory registration, no option of being registered under
Composition Levy etc.

3.3 Collection of Tax at Source (‘TCS’)

3.3.1 The Model GST Law proposes to cover online websites including the food
delivery startups as Electronic Commerce Operator (‘ECO’) defined under Section
43B of the Model GST Law. Such ECOs will get covered under the ambit of the new
levy of collection of tax at source (‘TCS’) under section 43C.

3.3.2 Let us try and understand how the website shall collect and deposit TCS on
behalf of the restaurant with the help of an example.

3.3.3 Customer buys food worth INR~1,000 and pays INR~200 (20% GST rate
assumed) as GST on the same to the website. Thus, the website collects INR 1,200
on behalf of the restaurant and passes the consideration net of commission.

*Assuming website charges a commission of 10%, invoice raised by website to

restaurant would show:

Particulars Amount (INR)

Charges for Commission 100

(+) GST (assumed 20%) 20

Total invoice value 120

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Goods and Services Tax (GST) on Online Food Delivery Websites 08/07/18, 1(10 AM

**Consideration for food is INR1,000. TCS collected on the same would be INR200
(assuming TCS rate is same as GST rate). Website would pass on [consideration for
food less TCS less commission charges (including tax)] to the restaurant, i.e.,
INR1,200 – INR200 – INR120 = INR880. The restaurant will avail INR20 as ITC and
the website will deposit INR200 to Government to the credit of the restaurant.

3.3.4 The provision of TCS means that everytime the website makes payment to the
restaurants, it shall have to collect tax at source and deposit with Revenue on a
monthly basis and file requisite returns. This process will surely lead to loads of
added compliances for a website in terms of deducting taxes, filing returns and
keeping records for all such transactions.

3.3.5 This also means lesser cash flows for the restaurants and should any
restaurant be less than the GST registration turnover threshlod, any such tax
deducted by the website will need to be taken as a refund.

3.3.6 Whether the Cook and Delivery websites will have to collect TCS?

Clause (e) of section 43B has been reiterated hereunder:

‘‘electronic commerce operator’ shall include every person who, directly or

indirectly, owns, operates or manages an electronic website that is engaged in
facilitating the supply of any goods and/or services or in providing any information or
any other services incidental to or in connection there with but shall not include
persons engaged in supply of such goods and/or services on their own behalf.’

3.3.7 The obligation to collect and deposit TCS is only on an ECO. In accordance
with the definition of ECO, it can be construed that a person engaged in a cook and
delivery website should not qualify as an ECO since he is engaged in supply of
service on his own behalf.

Conclusion

It is apparent that GST will surely create a paradigm shift in the way businesses will
be done. For the country as a whole, GST will bring out radical changes. Since the
Indian GST strucutre is dual in nature, businesses would need to now comply with
many more statutory requirements in the form of returns, tax payments and
registrations. This shall also result in increased working capital requirements and
perhaps, increased investments in management and finance.

The food delivery websites should gear up with the changes that may be required in
their supply chain and ERP systems to avoid any last minute unnecessary
complications.

—————————————————

Authored by Nimish Goel, Partner and Head of Indirect Tax/GST at

International Business Advisors (www.ibadvisors.co). Nimish has a vast
experience of more than 13 years in Customs, Excise, Service tax and
VAT. Nimish has been a part of EY India and then with KPMG in Europe where he
learnt the nuances of GST and is a regular author of articles on issues related to
indirect taxes including GST. For any professional assistance, he can be reached on
nimish.goel@ibadvisors.co. Uday Mehta, Article Trainee assisted him in this article.

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Goods and Services Tax (GST) on Online Food Delivery Websites 08/07/18, 1(10 AM

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