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Impact of GST on Cab Services in India

With the increased number of people going out to work, their lifestyles have changed drastically. For travelling to and fro, people have started getting their vehicles instead of relying on public transport. However, people in metros or semi-metro cities do not wish to take their cars or vehicles out owing to the intense traffic and other expenses like parking and driver. Therefore, with the introduction of cab services like Ola and Uber in the country, people have become dependent on these services. They prefer cab service over driving themselves to places they want to go.

The taxi market is growing at a rapid pace because of the affordable rates charged by some of the top cab service companies. With cab service provider giants like Ola and Uber providing affordable services and the introduction of GST, it can be said the market has gained more scope for growth.

GST impact on cab services

Goods and Services Tax (GST) has brought a ripple of cheer for all the cab users by placing transport services under the lowest tax bracket of 5 percent. The cab fares in the pre-GST regime were taxed at 6 percent.

The decision of charging GST depends on the companies’ pricing policy. If they want to offer an all-inclusive price, for instance, Rs. 8/km inclusive of taxes, then the drivers will have to bear the extra burden if the company decides to pass it on them. However, if the companies decide to set the price exclusive of taxes and pass on the tax on the customers, it may hamper the demand owing to the increase in fare

Car Leasing

However, with GST the leasing rentals for the driver as well as for partners of the companies has increased. Earlier, during the pre-GST regime, the drivers were liable to pay 14.5 percent as VAT on their leasing rentals. They will have to pay more now as the GST is 29-43 percent for leasing rental. This can prove to be a burden for cab drivers who enter into the leasing agreement for renting a car and driving the same, as they cannot afford to buy their vehicle. The increase in the leasing rentals is the result of double taxation on the existing leases which will be borne out by the cab drivers alone.

Reverse Charge Mechanism

The Central Government is empowered to notify Reverse Charge mechanism on services on which the liability to pay service taxes will be on the receiver of the services to the specified extent instead of the service provider, as per Section 68(2) of the Finance Act, 1994.

Pre-GST Regime

Under the pre-GST regime, the Rent-a-cab services were taxable, either under the full reverse charge or the partial reverse charge by availing of abatement.

  • If abatement was availed

If the service provider chose to take abatement, the service receiver had to pay full tax under the RCM on the abated value, i.e. on 40% value.

  • If abatement was not availed

If the service provider chose not to take abatement, the partial RCM is applicable, and service receiver and provider both had to pay 50% tax.

GST Regime

As per the 14th GST Council meeting held at Srinagar, Jammu & Kashmir, services provided by radio taxi or passenger transport services through electronic commerce operator has been put under full RCM. Therefore full tax is to be paid by the service providers.

ITC on Cab Services

Input Tax Credit means the reduction of taxes already paid on the inputs from the taxes which are to be paid on the output. Cab service companies will be able to enjoy the tax credit on the purchases that it will make to provide cab service to their customers. Suppose Ola uses services of a driving school to teach drivers, it can claim credit for that service on which it pays GST. They can also enjoy tax credit on inputs such as rent paid, telephone bills, etc. Businesses, however, cannot claim input tax credit for the taxes paid on cab services. At the 20th GST council meeting that was held on 5th August, the rates, as well as the availability of ITC on Rent-a-cab service, was revised.

Cab service providers will have two options for claiming ITC under GST.

Option 1: To Pay 5 percent and not claim ITC

Service providers can choose not to claim input tax credit of the tax they have paid on various inputs. They can then pay only 5 percent output GST.

Option 2: Pay 12% and claim ITC

Cab service providers can claim input tax credit for the taxes paid on cab services that are paid on various inputs if they pay 12 percent GST.

Benefits of GST on cab services

GST has contributed to the reduction in taxes as far as transport services are concerned. There are following benefits of GST.

  1. Travelling by cabs will be encouraged due to cheaper cab rates.
  2. Traffic congestion on roads will reduce eventually owing to the boost in transport services.
  3. Reduction in cab fares will lead to better savings in transportation cost.

Conclusion

While the small drop of 1 percent, under GST, in the regular cab fares has been welcomed with open arms, GST has also brought chaos in the lease payments. Due to this, chances of default payments have gone up, otherwise increasing the cost that the drivers will have to bear which may lead them to change their employment.

Sony Pandey
Sony Pandey
Sony works as a Tax Researcher at H&R Block India. She makes taxes easy to understand for people. She creates content for the website, marketing activities and social media. She carries experience in creating a wide variety of content like blogs, press releases, research papers, etc.

1 Comment

  1. VB says:

    Thanks for the article Sony. What would be the effective date for implementation of vehicle leasing abated ratea? The council decision notification clearly states 01 Jul 17 but my vehicle leasing company says 13 Oct 17 (date of notification).

    I want ti take it up with leasing xompany.

    I have tried knocking the doors of gst helpdesk but they are as expected not forthcoming with clarification. Please advise how to get clarification on the matter from useless and unwilling to help GST helpdesk.

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