[Analysis] GST Implications of Subscription-Based Models for Drivers in the Cab Aggregator Industry

GST Implications for ECOs Under Traditional and Subscription-Based Models in Passenger Transport
Under the GST framework, Electronic Commerce Operators are responsible for paying taxes on passenger transportation services supplied through their platforms. However, the shift to subscription-based models will have significant implications for GST liabilities and compliance. In the traditional model, aggregators are liable to pay GST on passenger transportation services, and GST is also chargeable on the commission payable by the ECO to the drivers. However, under the new subscription model, ECO is only liable to pay GST on the subscription fee chargeable from the auto drivers. The new subscription based model seems to be a beneficial situation for the stakeholders, however, it's important to acknowledge the potential for future litigations and potential disruptions by GST authorities, given that this shift could lead to a reduction in GST revenue flow.

Table of Contents

1. Introduction
2. Understanding Traditional Aggregation Model vs Subscription-Based Model
3. Legal Provisions Interpretations – A Closer Look
4. GST Implications and Considerations
5. Conclusion and Recommendations

1. Introduction

The evolution of passenger transportation services facilitated by aggregators like Ola and Uber has been a blend of innovation and challenges. Amid efforts to address persistent issues such as ride cancellations and payment delays, a new model is emerging, which is, Subscription-based Models for Drivers.

Recently, key players in the industry have begun implementing subscription-based plans for auto-rickshaw drivers. While this move holds potential to lessen the burden and optimize earnings of the drivers, it also raises pertinent questions regarding its GST implications. This is due to the shift in revenue dynamics and payment structures compared to the traditional model.

This article discusses the GST implications on the subscription based models introduced by the prominent players in the cab aggregator industry.

2. Understanding Traditional Aggregation Model vs Subscription-Based Model

In the traditional cab aggregation model, cab drivers use the aggregator’s platforms to provide passenger transportation services, with the aggregators primarily facilitating and coordinating transportation for customers. Fundamentally, the contractual relationship between drivers and aggregators operates on a principle-to-principle basis, where drivers offer transportation services to the aggregator’s customers through the aggregator’s platform. This traditional model operated on a commission-based revenue model, where the aggregator retained a portion of the fare for each ride as commission and transferred the remainder to driver partners.

Under the new subscription model, the aggregator ceases to function as an ‘aggregator’; instead, they will now only charge a per-day or per-week fee/subscription from the auto driver partners to get listed/discovered by customers on their platforms looking to book a ride. Thus, the aggregator’s role will be limited to connecting customers with auto drivers, with no responsibility for the provision of transportation services. Whereas, the auto drivers will be formally responsible for providing transportation services to customers, who will be liable to make payments directly to the auto driver rather than to the aggregator. Furthermore, auto drivers are not required to report their individual supplies to the aggregators, nor they are obligated to make payments to the aggregators for each supply made to connected customers.

3. Legal Provisions Interpretations – A Closer Look

Under the GST framework, the responsibility for paying taxes on passenger transportation services via radio-taxis, motor cabs, maxi cabs, etc. lies with the Electronic Commerce Operator (ECO), when such services are supplied through it .

It should be noted that the above taxability arises only when the supplies are supplied ‘through‘ ECO.

Below are the relevant GST provisions outlining this liability for your reference.

Section 2(45) of the CGST Act

‘Electronic commerce operator’ means any person who owns operates or manages digital or electronic facility or platform for electronic commerce.

Section 9(5) of the CGST Act

The Government may, on the recommendations of the Council, by notification, specify categories of services the tax on intra-State supplies of which shall be paid by the electronic commerce operator if such services are supplied through it, and all the provisions of this Act shall apply to such electronic commerce operator as if he is the supplier liable for paying the tax in relation to the supply of such services.

Notification No. 17/2017-Central Tax (Rate), Dated 28-6-2017

In exercise of the powers conferred by sub-section (5) of section 9 of the Central Goods and Services Tax Act, 2017 (12 of 2017), the Central Government, on the recommendations of the Council, hereby notifies that in case of the following categories of services, the tax on intra-State supplies shall be paid by the electronic commerce operator—

(i) services by way of transportation of passengers by a radio-taxi, motorcab, maxicab, motor cycle, or any other motor vehicle except omnibus

Reference in this regard can be drawn from the Karnataka AAR ruling in case of Juspay Technologies (P.) Ltd. (‘Namma Yatri’ app) wherein it was held¹ that Applicant merely connects auto drivers and passengers, and their role ends on such connection. They do not collect consideration and have no control over the actual provision of service by service providers, and neither do they take responsibility for the operation and completion of the ride. Although, the applicant satisfies the definition of electronic commerce operator, however, the said supply of services is not made through the electronic commerce operator but is independent. Therefore, the applicant does not satisfy the conditions of section 9(5) for the discharge of tax liability by the electronic commerce operator. Thus, the applicant is not the person liable for the discharge of tax liability under section 9(5).

In this case, the AAR focussed on the term ‘through’, and interpreted that the word ‘through’ implies that the supply should be initiated, carried on and concluded by the specific method.

4. GST Implications and Considerations

The shift to subscription-based models in cab services has significant implications for GST liabilities.

In the traditional aggregator model, the aggregator is liable to pay GST on passenger transportation services, and when cab services are provided through aggregators, GST is paid by the aggregators themselves. Additionally, GST is separately chargeable on the commission payable by the ECO to the drivers.

However, under the new subscription model, the passenger transportation services are not provided ‘through’ ECO and ECO is only linking the auto drivers and the customers for which the ECO is charging subscription fee from the auto drivers. Thus, ECO is liable to pay GST only on the subscription fee chargeable from the auto drivers.

Furthermore, passenger transportation services provided by auto rickshaws, including e-rickshaws, are exempted  from GST. However, this exemption is not² applicable when such services are supplied through an ECO on which such ECO is liable to pay GST under Section 9(5). Therefore, passenger transportation fee charged by the ECO from customers is subject to GST under the traditional aggregator model. However, the benefit of exemption will be available in case of subscription model.

5. Conclusion and Recommendations

The new subscription based model appears to be a win-win situation for all parties involved, where the ECO receives recurring and fixed revenue from auto drivers, drivers directly receive consideration for their services from customers, and the benefit of the GST exemption is passed on to customers, thereby reducing the GST burden on the ultimate customer.

However, it’s important to acknowledge the potential for future litigations and potential disruptions by GST authorities, given that this shift could lead to a reduction in revenue flow solely due to the change in business model. Any significant alteration in business models, especially those affecting revenue flows and tax liabilities, can attract scrutiny from tax authorities. Therefore, it becomes imperative for aggregators to understand their GST liabilities and ensure compliance with the relevant provisions to avoid any legal issues in the future.

1. [2023] 154 taxmann.com 607 (AAR – Karnataka)
2. Proviso to Sl. No. 17 of Notification No. 12/2017-Central Tax (Rate), Dated 28-06-2017