The trend of online and mobile shopping has been changing our lives in a big way. With the use of websites and mobile apps, one can now buy almost everything from a pin to a plane from anywhere in the world. The greatest beneficiaries of e-Commerce have been the consumer products segment and some service sectors such as the cab travel sector.
Under Indian Indirect Tax laws, state governments collect Value Added Tax (VAT) on sale of goods (such as consumer products) and the Central Government collects Service Tax on services (such as cab services).
With e-Commerce and the marketplace setup created by e-Commerce platform owners, the latter act as the connecting point for vendors and customers. Therefore, in most transactions conducted on an e-Commerce platform, the retail customer does not have a preference regarding the seller of products or provider of services. What the customer relies on is generally the brand value of the platform owner/operator, commonly known as “aggregators,” and places his/her request at the price agreed on with the aggregator.
There are several aggregators operating in services in India, and one of the most prominent of these being the cab service segment. Typical business models of such apps could be:
- The aggregator develops a technology solution (application or app), which is used by “riders” to avail services from transportation operators registered on the app. The aggregator acts as an intermediary by bringing together the transportation operator and the rider through the app.
- The contract for transportation services is between the transportation operator and the rider. While the aggregator does not provide services to riders, the transportation operator earns the fare for transportation services provided to the rider and pays a fee to the aggregator for sourcing the rider.
- The aggregator usually arranges for fares to be centrally collected from the riders and periodically pays this to the respective transportation operator after deducting its fee.
In most cases, Indirect Tax is to be deposited in the Government’s treasury by the actual seller/service provider. In the e-Commerce model, several sellers or service providers deliver goods and services through a common platform. The process of reaching out to them to press for registration and collection of tax is cumbersome for the regulators, and is fraught with the risk of failure. There may be a possibility of tracking actual sellers with regard to transactions in goods (since their movements are traceable), but the challenge lies in taxing services provided on platforms.
In the Finance Bill, 2015, the Central Government has taken the lead in formulating a new mechanism to collect Service Tax on services provided through aggregator models.
Effective 1 March 2015, the Service Tax law has been amended to make aggregators responsible for depositing Service Tax on all services provided under their brand names. Aggregators have been defined as persons who own and manage web-based applications, which enables potential customers to connect with service providers providing services under the aggregators’ brands or trade names.
In the business model mentioned above, it is clear that in most cases, owners of such apps are merely intermediaries. The introduction of the aggregator concept will now cover app owners as persons who are liable to pay Service Tax on passenger transport services provided by transport operators (who are the actual service providers).
With this change in Service Tax rules, a person other than a service provider or receiver has been made liable to pay Service Tax for the first time in recent times. By assessing the aggregator, the Government should be able to recover Service Tax on services provided by various service providers through a common platform.
It is interesting to note that the definition of an aggregator has been widened to include cases when the aggregator is outside India. In such cases, the representative of aggregators or any person appointed by them will be liable to Service Tax. This is to bring about parity between aggregators operating in India and those operating abroad. However, will the Government actually be able to enforce these regulations on aggregators located outside India? It will be interesting to see how this works if an aggregator chooses not to pay Service Tax.
This change is likely to have a negative impact on vendors providing services under such aggregators’ brand names. Now that liability to pay Service Tax has shifted from the vendor to the aggregator, the Cenvat Credit accumulated by a vendor on expenses will remain unutilized. Vendors will have no option but to absorb the cost of Service Tax charged their expenses, since no refund of such credit will be allowed.
Aggregators will now have to maintain proper records of their own Service Tax liability (on charges recovered from vendors) with the liability resting on them for the service providers. The manner in which Service Tax liability should be reported in the returns of aggregators and service vendors should also be thought through. The Government should release clear guidelines regarding how aggregators will be assessed and how they are expected to maintain records.
Aggregators will have to start collecting Service Tax if they are not already levying it, over and above amounts charged to customers. Given that these changes have been effective from 1 March 2015, Service Tax liability for earlier periods will continue to remain with service providers providing services under different platforms. Moreover, we will have to wait and watch if similar provisions are continued in the Goods and Service Tax regulations once it these are rolled out.
Pratik Sampat, Senior Manager, IndirectTax has also contributed to this article.