The dawn of Cab aggregators Uber, Ola, etc.., has been seen in India in recent times, but the laws pertaining to service tax in the aggregators model of service was in gray. The aggregator model of service is new in India and there has been a lack of clarity about service tax rules that must apply toward Uber, Ola, etc… These companies designed their mobile app and tied up with people having their personal cars that could ply as cabs. The mobile app allows any customer to simply log on to the app on registration, identify the nearest cab and then book it. The drivers get intimation through the GPS and reach the pick-up point and then drop the customer at their destination. The cabs are not owned by either Uber or Ola but are in the ownership of the drivers. Since Uber does not own the cabs, the point of contention was whether Uber, Ola, etc.., is a provider of a radio cab/passenger transport service or not, since they do not own the cab and by merely owning the mobile app that connects the actual cab owners with the customers were they actually providing the service. The contention probably was that the privity of contract to provide passenger transport/ radio cab service is between the driver owner and the customer and consequently, Uber, Ola, etc.., were nowhere in the picture to discharge the tax.
The defence of the aggregator was that they do not provide any service so as to be liable to Service Tax as there was no specific definition of aggregator. The major reason behind the introduction of the definition was that the Government was probably finding it difficult to tax drivers as the majority of the cab owners with Uber are individuals and simultaneously unable to tax the mobile App owners as well. That meant loss of revenue to the Exchequer. Government has now specifically provided that such services shall be liable to Service Tax as for the first time, a person other than service provider or the service receiver has been saddled with the liability to pay tax.
In fact it become very important to understand the business of aggregator model of service & the parties involved therein before understanding the legalities on same. This business model engages
and brings them to a common unified platform. Service providers (drivers) take loan to become business partner with app – based transport companies which also act as facilitators for loans. To be cautious, Radio Taxi model is different from aggregator model. Let us bring out a clear distinction between the ‘aggregator model of service’ & ‘radio taxi model’.
Provisions of Service Tax:
To get into a more fruit full outcome, it becomes significant enough to lay down the definition of aggregator as defined in Rule 2(aa) of Service Tax Rules as inserted by the Service Tax (Amendment) Rules, 2015 vide Notification No. 5/2015-ST dated 1.3.2015 defines ‘aggregator’ as under –
“Aggregator means a person, who owns and manages a Web-based software application, and by means of the application and a communication device, enables a potential customer to connect with persons providing service of a particular kind under the brand name or trade name of the aggregator”
Accordingly, service provided by the aggregator has now been brought under Service Tax net. By virtue of amendments in Service Tax Rules, 1994, in respect of any service provided under the aggregator model, the aggregator is being made liable to pay Service Tax if the service is provided using the brand name of aggregator in any manner. In fact, it would be relevant to note that the aggregator model of service is not just restricted to Uber, Ola, etc.., but it extends to include within its ambit the aggregators like Flipkart, Snapdeal, Amazon, Groupon, etc.
From the above discussion it is amply clear that aggregator is the person liable to pay service tax under reverse charge mechanism vide Notification No. 30/2012-ST as amended by Notification 7/2015-ST dated 1.3.2015. Entire 100% of Service Tax shall be payable by the aggregator with effect from 1st March, 2015. The effective rate of service tax is 14% with effect from 1st June, 2015.
The Genuine question that should arise is that what if the aggregator does not have a physical presence in the taxable territory? No worries! The central government has stated that any person representing the aggregator for any purpose in the taxable territory shall be liable for paying service tax. In fact, situation may arise wherein the aggregator may neither have a physical presence nor have a representative for any purpose in the taxable territory. In this connection, it would be relevant to note that the aggregator shall appoint a person in the taxable territory for the purpose of paying service tax, and such person shall be liable for paying service tax.
Connection with Rent-a-Cab service:
Now let us analyze the impact of these transactions on ‘Rent-a-Cab’ service as per Reverse Charge Mechanism. Reverse charge is applicable in respect of services provided or agreed to be provided by way of renting of a motor vehicle designed to carry passengers if service provider is individual, Hindu Undivided Family or partnership firm, whether registered or not, including association of persons and customer is a business entity registered as body corporate. In this connection, it would be pertinent to note that the contractual terms between the aggregator & Cab driver determines the service tax liability.
♣ Aggregator acting as a Rent-a-Cab service provider:
Suppose Uber Cabs (aggregator) acts as a rent-a-cab service provider charges INR 1000/- and for this it engages independent cab driver (owning the cab) for rendering the service. Commission of Uber Cabs is INR 100/- out of INR 1000/-. In such case, Rent-a-cab service is rendered by the aggregator and is liable to discharge service tax on this service. However, in case where Aggregator is individual, HUF, or partnership firm, whether registered or not, including association of persons and customer is a business entity registered as body corporate then the customer is liable to discharge the service tax under reverse charge.
In respect of the services provided by cab driver, by virtue of the amendment made in Finance Bill 2015, the aggregator shall also be liable to discharge service tax under reverse charge on Rs. 900/- received by the cab driver. The service tax paid on Rs. 900/- may become additional cost for the transportation services if the Aggregator is not entitled for the Cenvat credit of the same.
♣ Aggregator acting as an agent for procuring business for cab driver and letting cab driver to use its brand name/ trade name:
In this case, Cab driver is rendering rent-a-cab service to the customers. Aggregator is liable to pay service tax on INR 100/- received for its services. By virtue of the amendment made in the Finance Bill 2015, the aggregator shall also be liable to discharge service tax under reverse charge on Rs. 900/- received by the cab driver. The service tax paid by Aggregator would become cost, and in turn would increase the cost of transportation.
In this situation, once should be cautious that Rent-a-cab service is rendered by the cab driver who may be an individual, HUF, etc… If the cab driver is an individual and customer is a business entity registered as body corporate, reverse charge provisions would apply and the customer would be liable to discharge service tax on the same Rs. 900/-.
Happy Uber, Ola rides!!
Disclaimer: The views expressed are strictly of the author and the author is not responsible or liable for any loss or damage caused to anyone due to any interpretation, error, omission in this article.
(Autored by Aditya Singhania and Nischal Agarwal