Profit Party Over for Food Giants?

Hey there,

First, a ₹45,000 Cr tax on the Gaming Industry.

Now, the government hits Swiggy and Zomato with a ₹1,000 Cr tax bill!

An 18% tax on all delivery fees ever charged, retroactive from 2016.

Here’s how this could be a massive THREAT to the future of Swiggy and Zomato 👇

Here’s the quick back story. Swiggy and Zomato have been leading the food delivery scene in India for over ten years. They've grown huge, doing business worth Rs. 15,000 Cr in India. But still, this tax bill is a big deal for them.

The government's decision to levy an 18% tax on delivery fees, retroactive to 2016, has come as a shock.

Swiggy and Zomato argue that their delivery partners are contractors, not employees. Despite this, each company has been asked to pay Rs. 500 Cr. This unexpected demand could derail their ambitious plans for 2024.

Here's a closer look at the implications of this tax notice:

1/ Back to Square One?

Zomato's journey to profitability has been a headline story. From making Rs. 2 Cr in one quarter to Rs. 36 Cr in the next, they've shown promising growth. But being forced to pay Rs 500 crore taxes could make Zomato unprofitable again.

Swiggy also met its goal of food delivery profitability in March 2023 after long efforts. But again, paying Rs 500 crore now puts that hard-won profitability at risk ahead of its 2024 planned IPO.

2/ Everyone Feels the Pinch

This tax increase is likely to have a domino effect. To offset the new costs, Swiggy and Zomato may increase charges for restaurant partners. This includes higher discovery and listing fees. Consequently, consumers might see an increase in delivery charges.

Restaurants, already operating on thin margins, might have no choice but to increase the prices of their food items. This will directly impact the end consumers, making dining more expensive.

3/ More People Might Go Premium

As prices rise across the board, premium services like Zomato GOLD and Swiggy ONE could see a surge in memberships. These services offer value and convenience, which might become more appealing in light of the increased costs.

This could be a silver lining for these companies, helping to build customer loyalty and offset some of the financial strain caused by the tax notice.

The government's move, while possibly aimed at increasing revenue, raises concerns about the stability of the entrepreneurial ecosystem in India.

After the gaming industry, the focus on food tech startups shows a pattern that can force budding entrepreneurs to set up shops outside India, potentially slowing down the country's progress towards a 5T economy.

This situation is a learning for all startups about the importance of regulatory compliance and being prepared for unforeseen challenges.

✍️ Jargon of the day

Discovery Costs - Discovery costs on platforms like Swiggy and Zomato are fees that restaurants pay to get more visibility on these apps.

Think of it like paying for a better spot in a crowded market. When a restaurant pays these fees, their name pops up first or in special sections on the app, catching the eye of more customers. This can lead to more orders and more business for the restaurant.

Loved this edition? Or have some thoughts to share? We'd love to hear from you

Cheers,
Karthik