Levy of service tax on services by radio taxis

Existing provisions

a) As per section 66D (o) of the Finance Act, 1994 ("the Act"), services by way of transportation of passenger, with or without accompanied belongings, by metered cabs, radio taxis or auto rickshaws, forms a part of the negative list.

b) However, services provided by way of renting of motor vehicles designed to carry passengers is subject to the levy of service tax.

c) As per the Notification No 30/ 2012 dated June 20, 2012, where services in the nature of renting of motor vehicles designed to carry passengers are provided by an individual, Hindu Undivided Family or partnership firm (including association of persons) to a business entity registered as a body corporate, the service tax liability in respect of such services is required to be remitted by the service recipient either partially or fully depending on whether the service provider has opted for abatement or otherwise:

• If the service provider has claimed abatement then the service recipient (i.e., a service recipient who is a registered body corporate) is required to discharge 100 percent of the service tax liability under reverse charge mechanism.
• If the service provider has not claimed any abatement then the service recipient (i.e., a service recipient who is a registered body corporate) is required to discharge 40% of the service tax liability and the balance 60% is to be discharged by the service provider.

Proposed amendments

a) As a measure to widen the tax base, Union Budget, 2014 has proposed for service tax to be levied on services provided by way of transportation of passengers by radio taxis or radio cabs, whether or not air-conditioned.

b) A definition of the term "radio taxi" has been inserted by way of an amendment to Notification 25/2012 – Service Tax dated June 20, 2012 (vide Notification 6/2014 – Service Tax, dated July 11, 2014).

c) As per the definition "radio taxi' means "a taxi including a radio cab, by whatever name called, which is in two-way radio communication with a central control office and is enabled for tracking using Global Positioning System (GPS) or General Packet Radio Service (GPRS)."

d) Further, the abatement presently available to rent-a-cab operators would be available to radio taxi services with a view to bring both the services at par.

e) The Union Budget, 2014 has also proposed consequent changes to Notification No 30/ 2012 dated June 20, 2012 vide Notification No 10/2014 dated July 11, 2014 ("New Notification"):

• As per the New Notification, where a radio taxi service provider claims the benefit of abatement, then in such a case, the service recipient (being a registered body corporate) would continue to discharge 100% of the service tax liability under the reverse charge mechanism.
• However, where the service provider has not claimed any abatement, then the service recipient (being a registered body corporate) would be required to discharge 50% of the service tax liability under reverse charge (as opposed to 40% under the current law). The balance 50% would have to be remitted by the service provider.

f) Corresponding amendments have also been proposed to Notification 26/2012 – Service Tax dated June 20, 2012 (vide Notification 8/2014 – Service Tax dated July 11, 2014), whereby the taxable value for radio taxi services has been specified to be 40 percent subject to the condition that CENVAT credit on inputs, capital goods and input services used for providing taxable services, has not been availed.

g) The provisions pertaining to taxability of services provided by radio taxis and the corresponding abatement provisions and reverse charge liability provisions would come into effect from the date as may be notified by the Central Government.

Issues

a) While services by radio taxis are proposed to be subject to service tax, services by metered cabs would continue to be outside the ambit of service tax even though there is no significant difference in the nature of service provided.

b) The taxability of the service would depend on whether the taxi has a GPS/ GPRS and is in two-way radio communication with a central control room. Classification disputes based on the above cannot be ruled out.

c) Body corporates receiving radio taxi services likely to be subject to additional compliances pertaining to domestic reverse charge.

Tax impact

a) Services received from radio taxis may not qualify as "input service" and therefore impact of this new levy in terms of increased cost in the hands of service recipients would have to be evaluated.

b) Potential challenges in SEZ units/ developers being in a position to avail upfront exemption on these services, given the just-in-time nature of these service