Swiggy is the poster boy of the pack and parcel a.k.a food delivery industry. It has enjoyed a dream run so far both in terms of market valuation as well as capital investment. This is not just on paper. You can get an idea about the changing landscape by visiting your favorite restaurant this weekend.
The first thing you would notice is a bunch of people decked in orange T-shirts chattering and waiting at the doorstep. This is a common sight across major restaurants in all cities (big or small).
This is a good first-hand experience you can have of the market disruption caused by one of the fastest growing food delivery startups. But all is not well in the sector growing exponentially on the back of instant deliveries by unemployed youths.
Post-November, the reduction in GST rates on eating outlets has created quite a stir. Reportedly, the 18% GST was reduced to 5% coupled with the withdrawal of input tax credit provision for good. As an after effect, restaurants are now charging higher prices on online food delivery platforms like Swiggy, Zomato, and Foodpanda. Some restaurants, on the other hand, have opted for a commission cuts with their online food delivery partners. Restaurants hope to cover for the 3.5 percent additional cost incurred post-ITC withdrawal by the Government.
Some Key points to note post-ITC withdrawal:
- Online Food Delivery Services are provided at a commission of around 20 per-cent (including 18% GST).
- Restaurants can no longer claim ITC on the 18 percent GST against input services from these delivery platforms.
- Pressure from Restaurants on Online Food Delivery Services to cut margins.
- Swiggy, the market leader, has asked for GST rate reduction on input services to five percent.
A government official confirmed
”These online food delivery companies have represented for a rate reduction or to allow ITC to restaurants. The matter is being discussed”.
Impact of ITC Withdrawal
1. A possible impact of the ITC withdrawal is the price hike. This has come as a setback for many who expect other restaurants to follow suit.
2. As per a senior executive of a major online food-delivery player said that many restaurants are slowly increasing the prices on online delivery platforms as 18% GST rate on restaurants is not feasible.
3. The increased prices could also dampen the growth of online food delivery services. Some experts believe that reduction in GST will check food costs as well as increase employment opportunity.
4. Furthermore, the total number of registered restaurants on food delivery platforms stand at 100,000. About 70% of the orders on these platforms are through digital payments. This is a great facilitator for the government’s digital payment campaign. A reduced GST will go a long way in further promoting the digital campaign.
5. Scalability will be most impacted. Growth plan via new franchise outlets for marquee restaurants will be less feasible. In comparison to the five percent GST on food bills, the GST on royalty and franchise fee is 18 percent. This could clearly chain the Rs 200-billion restaurant chain sector is currently growing at 22 percent annually.
6. Set-Up costs for new/franchise restaurants could scale by 10-15 percent
Hence we see that as the Government ponders over the recall of ITC limit provision for restaurant owners under GST, the current scenario has for the time being restaurant chain owners and franchise partners to go back to the drawing board.
Kunal Wadhwa, partner — indirect tax, PwC India believes
”The only way to encourage the use of technology and to incentivize restaurants to use online delivery partners is by reducing the GST rate, which would add to the growth of this theme”.