NEW DELHI: Ride-hailing app companies are pitching for goods and services tax exemption for payments that customers make for transportation services availed through their online platforms. The Goods and Services Tax Council is set to review the GST law at the central and state levels to offer more clarity and uniformity of taxation in this sector.
Mint looks at how these app companies work and why the council is keen to amend the law on priority.
Are taxi services availed through online apps subject to GST?
The law states that notified e-commerce services must pay GST on services offered ‘through’ their platforms. The aim is to make sure GST is collected from services that online platforms provide, including ride-hailing.
The digital economy offers greater opportunity to achieve scale and transparency, and the ease and enhanced customer experience make online ride-hailing appealing.
However, the ride-hailing segment is marked by different business practices and models. Those following a ‘subscription’ model argue that services delivered by their partner-drivers are not liable to pay GST, a position that’s increasingly becoming the standard claim.
What models do ride-hailing app companies follow?
There are two business models in the sector: commission-based and subscription-based. In the commission-based model, taxi fares are decided on the platform and payment is made either through the app or directly to the driver. The platform takes a commission on each payment. Here, there is no dispute about the taxability of the e-commerce service.
The contentious model is the subscription-based one, where the partner-driver usually pays a fee to the platform. Customers can negotiate fares with drivers and pay them directly. The platforms claim their role is only to connect the two parties. The service is provided by the drivers outside the platform, and they contend that this does not make them liable to pay tax.
Which law deals with taxation of e-commerce operators?
Section 9 (5) of the Central GST Act and corresponding provisions in state laws deal with the taxability of notified e-commerce services. The provision deems the e-commerce platform as the entity responsible for collecting GST from consumers and remitting it to the exchequer.
Driver-partners, who are the service suppliers, most often have a turnover that is below the threshold stipulated to get a GST registration number, without which they cannot collect the tax from customers.
What is the thinking in the GST Council?
A panel of officials is looking into the matter and will place their report before the council members in the near future. The matter was discussed by the council in December 2024, when it was pointed out that the final consumer bears the 5% tax on the value of the service, not the driver-partners of the platform.
Also, tax policy cannot discriminate between narrowly distinguished business models offering the same service. If that is done, it will encourage others to tweak their practices and get out of the tax base.
The council is expected to clarify whether, for tax purposes, agreeing to offer a service through an online platform is the same as actually providing it through the platform.
Which other businesses are covered under this section?
Besides ride-hailing, e-commerce operators offering services including accommodation or lodging, housekeeping, plumbing and carpentry are required to collect tax and pay the government. This applies in cases where the entities actually offering these services are not required to get a GST registration number because of their low turnover.
The provision covers restaurants that offer their services at locations other than their specified premises. For the service sector, the annual sales threshold for getting a GST registration number is ₹20 lakh.
GST encourages formalization of the economy and the collection of tax on services rendered through apps aims to enhance the tax base. However, ride-hailing app companies following the subscription model now do not pay GST.