Are you a cab operator??? Are you aware that there is service tax liability on Rent-A-cab service? In this article we have made an attempt to provide a brief of this entry.

At the outset, rent as defined in the Advanced Law Lexicon means “money paid for the occupation or use of something for a period of time (eg: a building, office, factory, car or television set).  Thus “Renting a cab” means that the cab is rented to another person for his occupation or use for a period of time.  Under this levy, the cab operator does not allow the possession of the cab to the service receiver but provides the vehicle with a driver to facilitate the transportation of passengers.  In case the cab was rented, there is a transfer of possession and control. The transaction will be liable to value added tax as it is right to use goods –[LAKSHMI AUDIO VISUAL INC vs. ASSISTANT COMMISSIONER OF COMMERCIAL TAXES AND ANOTHER (2001) 124 STC 0426],  Whereas if a car is hired without handing over the possession it attracts service tax.  Therefore the title “Rent” used for the entry is quite not depicting what the levy provides for.

However, in the case of Express Tours & Travels (P.)  Ltd v. CCE [2005] 1 STT 305 (Mum-CESTAT) it was held that a person cannot escape tax liability on the ground that ‘hiring’ was different from ‘renting’  since the government’s intention was to tax the providers of a service which involved hiring/renting of a cab formally for a longer duration.

This judgment has not considered the concept of deemed sale of goods which is liable to value added tax where the right to use is included by legal fiction which otherwise there is no transfer of property in goods (no transfer of ownership). In case of right to use only specific interest of ownership is transferred and not the ownership.

Under this scheme, only those cabs are covered which are hired for a period and not those which are hired under per kilometer basis for example: Easy Cabs

The definition of rent a cab operator does not stipulate that the rent a cab operator should be the owner of such cabs. Renting of cabs is important. Any operator can take cabs on hire and then rent such cars to third parties. Such person need not own the vehicles but must be engaged in the service of renting such vehicles for rent.

Basic tests

  • Ø The operator must be a person.
  • Ø The person must be engaged in a specified business.
  • Ø The business must be of renting a cab.

What is taxable service and who is a service provider??

As per Section 65(105)(o), any service provided or to be provided to any person by a rent-A-Cab scheme operator in relation to the renting of a cab .If the cab owner gives the cab on rent to the service recipient then he is liable to service tax. This taxable service has come into effect from 16/07/1997.

Definition of cab     

Cab is defined under Section 65(20) which means:

A] A motor Cab: Motor vehicles constructed or adapted to carry not more than six passengers excluding the driver.

B] A Maxi Cab: Motor vehicles constructed or adapted to carry more than six but less than twelve passengers excluding the driver.

C] Any Motor vehicle constructed or adapted to carry more than twelve passengers excluding the driver.

Method of valuation:

The valuation of taxable service can be done under two options:

A]     Pay tax on the gross amount of rent after availing the benefit CENVAT credit on inputs and input services.

B]     Pay on 40% (60 % abatement is available vide Notification No. 1/2006 wherein no CENVAT credit is allowed).

Take an example:

If a company is engaged in the business of renting of cabs and it rents six cabs to another company for Rs 12000/- for the month, Let the CENVAT credit be  Rs 500/- for the month.

Option A

Option B

Output tax(12,000*12.36%)Rs.1,483Output tax(12,000*40%*12.36%)Rs.594
Less: CENVAT credit   Rs.500
Net Service tax payable   Rs.983Service tax payableRs.594

 Special exemption:

There is one specific exemption from service tax liability – If maxi cab or motor vehicle are rented for use by an educational bodies like schools , colleges, universities  & educational institutes imparting skill or knowledge or lessons on any subject or field, other than commercial training or coaching centre’s . But, then this exemption to educational bodies is applicable only when the Cab hired is a Maxi cab or Motor vehicle. This table will make our understanding more clear about this exemption.

Service by Rent-A-Cab operator to another Rent-A-Cab operator:

Earlier vide Trade Notice No. 1/2000 dated 27/04/2000 Paragraph No. 5.3, service tax liability did not arise if a the service in relation to motor cab is provided by one Rent-A-Cab operator to another Rent-A-Cab operator.   Circular 96/7/2007 – ST dated 23.08.2007 clarifies that if only a part of the whole work is sub-contracted, then the sub-contractors service is a taxable service.  Eg: If a cab operator get a contract for 10 vehicles and he sub-contracts the same to another cab operator to the extent of 5 vehicles, he will be liable to pay service tax.  Whereas, if he sub-contracts for all the 10 vehicles he shall not be liable to service tax.  There is no logical deduction from such an interpretation and these trade notice and circulars read together might be confusing to the service providers.

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