Rent a Cab / Tour Operator

Cab Transport Services – Service Tax

In this article we discuss the rent a cab operator as well as the tour operators as at times there is a overlap in understanding amongst the two. It is understood that most of the members are registered as rent a cab operators.

Service Tax levy is attracted when the specified person provides the taxable service to the specified person as defined. Service is a human effort in the form of advise, use of skill or labour. Normally the transactions liable for VAT would not be subject matter of service tax other than works contract.

INTRODUCTION

Service tax on services of providing cabs on rent was first made taxable wide an amendment in the Finance Act, 1997 (taxable w.e.f. – 16.07.1997) wherein the service providers who were license holders under the Rent-a-Cab Scheme, 1989 framed by the Central Government were made taxable. Practically not many of these service providers were holding such licenses hence this service did not raise much revenue for the Government. Looking at this, the government exempted the service from tax w.e.f. 28.02.1999. It remained exempted till 1.04.2004 when it was reintroduced dispensing the requirement of holding a license under the Rent-a-Cab Scheme, 1989 thereby opening the web wide open. This category from the very beginning was not free from doubts as the intention of the government was not clear and the definition also seems to transgress the powers of local sales tax.

Rent-a-cab Business Models:

In our understanding, the following are the three service models which are generally being followed by the industry at large:

1. Providing cars, maxi-cabs and other small to medium vehicles to the customers on a monthly hiring basis, where the driver & fuel is provided by the service provider if asked for, otherwise the service provider charges for the vehicle and rest of the expenses like fuel, driver etc are to be borne by the customer himself.
2. The customer gets the vehicle on per kilometer rate basis, where the driver as well as the fuel is provided by the service provider and customer has to pay for as much as he travels subject to some minimum charges.
3. The above arrangement may also be a drop/ pick up service – say airport drop.
4. The service provider has his car pools at many places, the customer approaches and chooses a car. The service provider would part both the control and possession subject to the condition that the customer pays the refundable deposit as well the consideration for the usage. In this model the customer himself is responsible for driving the vehicle as well as fuel costs.

From the above three models, the first two are prevalent in India whereas the third model is yet to start in a major way. First model is used by the corporate as well as firms who contract vehicles as per their needs on a monthly rental basis whereas the second model is more prevalent in the tourist industry and for individual customers for their travel needs.

CONSTITUTIONAL VALIDITY:

The constitution validity of levy of service tax on rent-a-cab operator has been upheld in the case of Secretary, Federation of Bus Operators Association of Tamil Nadu v. UOI 2006 (2) STR 411 (Tri - Mad.). This was also approved b Tamil Nadu Tour Vehicles Owners & Operators Association 2003 (157) ELT A144 (SC)

“The High Court further held that if a person is plying Motor Cabs or Maxi Cabs and service are provided by him to any person in relation to renting of cabs, such service becomes ‘taxable service’ and comes within the ambit of Section 66(3) of Finance Act, 1994 and holding a licence under Rent-a-Cab Schemes, 1989 is not required for being leviable to Service Tax.

The High Court also held that tax on service is levied on a person if he is in the business of engaging tax is for his customers and giving them service even without owning or plying the vehicle and is not comparable to tax under Entry 56 list II of Schedule VII of Constitution of India where tax is levied only on person owning or plying a vehicle.

The Madras High Court further while upholding the constitutional validity of service tax on ‘tour operators’ or ‘rent-a-cab scheme operator’ held that tax on service is distinct from tax on profession, trade or calling and not falls under Entry 60 list II of Schedule VII of the Constitution of India.”

STATUTORY DEFINITIONS

1. As per section 65 (105) (o), taxable service is any service provided or to be provided to any person, by a ‘rent-a-cab scheme operator is in relation to renting of cab.

2. As per section 65 (91) ‘rent-a-cab scheme operator’ means any person engaged in the business of renting of cabs.

3. As per section 65 (20) “Cab” means –

• A motor cab, or
•  A maxi cab, or
• Any motor vehicle constructed or adapted to carry more than twelve passengers excluding for hire or reward

Provided that the maxi cab referred to in sub-clause (ii) or motor vehicle referred to in sub-clause (iii) which is rented for used by an educational body imparting skill or knowledge or lessons on any subject or field other than a commercial training or coaching centre shall not be included within the meaning of cab.

4.  As per section 65 (70) motor cab means any motor vehicle constructed or adapted to carry not more than six passengers excluding the driver for hire or reward.

5. As per section 65 (71) maxi cab means any motor vehicle constructed or adapted to carry more than six passengers but not more than twelve passengers excluding the driver for hire or reward.

From the above mentioned definition of cab, it is clear that a motor cab will be continued to be treated as cab in all cases where it is rented out, including cases of renting out for use by the educational bodies. However, maxi cabs or motor vehicles are excluded from the meaning of the cab when they are rented out to an educational body other than commercial training or coaching centre.

SCOPE

The scope of the taxable service covers any service provided or to be provided by rent-a-cab scheme operator to any person in relation to renting of cab. The word ‘rent’ means consideration paid usually periodically for the use or occupancy of property.

Among the business models discussed above, the following are the views of paper writer in respect of the liability under service tax:

1. Model I: Under the said model, the vehicle is provided or rather supplied without parting control and possession as the cab is manned by the driver rather service provider. The said activity is liable to service tax not under the category of Rent a cab but under the category of Supply of Tangible Goods for use service. Practically, many of the service providers are discharging service tax availing the abatement under notification 01/2006 – S.T, which in the view of the paper writer is not proper as no abatement is provided under the category of Supply of Tangible Goods for use service.
2. Model II: In the said model i.e. the transportation services provided to the customer, the service tax liability may not be attracted. In short, the customer approaches the service providers seeking transportation assistance from one point to another, there is no control or possession being parted away. Our view is also supported by the following decisions:

•  In the case of Kuldip Singh Gill reported in 2006(3) STR 689 has observed that the vehicle running on kilometer basis are not liable to service tax. 

• Further, the CESTAT in the case of RS Travels reported in 2008 (12) STR 27, where the tribunal observed that the cab operator providing cab with driver for going from one place to another either on kilometer basis or lump sum basis based on the distance is that of a transportation service and observed that no service tax is payable as the control over the vehicle is with the rent-a-cab operator.

• Further the tribunal in the case of Cochin International Airport Prepaid Taxi Operators Co-op society 2008 (16) STT 190, wherein the tribunal held that a co-operative society  formed by taxi drivers playing to and for airport cannot be considered as operating tours in a tourist vehicle for purpose of levy of service tax.

• In Best Call Taxi 2009 (18) STT 190, wherein the tribunal held that the activity of providing taxi on the basis of distances would not be covered within the ambit of tour and the activity in question was not taxable.

3. Model III: As regards to the 3^rd model is concerned, wherein the customer would be given a car of his choice without the driver i.e. the control and possession of the vehicle is parted away i.e. when the vehicles are given on lease/hire without the driver, effective control over the vehicle passes to the person taking the vehicle on hire. Such transaction becomes ‘transfer of right to use goods’ and are taxable under sales tax/vat.

From the above, the paper writer is of the view that none of the models generally followed are liable to service tax under the category of Rent a Cab. However, the service providers fearing the harassment of the department are discharging service tax under rent a cab.

VALUATION:

The following are the options available for discharge of service tax:

Option – 1

Pay service tax on the gross amount charged at the current prevailing rate i.e. 10.3%. In such case the service provider is eligible for CENVAT Credit on inputs, input services and capital goods. The service provider can take the excise duty credit on motor vehicles used for providing the services as capital goods credit.

Option – 2

Pay Service Tax on the 40% of the gross amount charged after availing the 60% abatement under Notification No. 1/2006 – S.T In such case the service provider cannot avail CENVAT Credit.

Basic exemption limit:

The service provider can avail the basic exemption limit if the aggregate value of the taxable service provided during the previous financial year has not exceeded Rs. 10 lakhs. A service provider who opts to avail this benefit and also satisfies the prescribed conditions and requirements need not pay Service Tax during the current year on the sum total of the first consecutive payments received during that financial year towards the gross amounts charged by the service provider for taxable services till the aggregate amount of such payments is equal to Rs. 10 lakhs.

The service provider using the brand name/trade name of another person and the service receiver liable to pay Service Tax under reverse charge mechanism are not eligible the basic exemption limit benefit.

Impact of levy on the industry

1.   The business as we understand is running in cut throat competition and the margins available would be just less than 5%. Further, with the increase in the cost of the fuel both in international market and domestic market, cost of the spares, cost of maintenance, the margins as depicted may not always be same and is in the decreasing trend.

2.   The contracts in the industry are always executed taking the assistance from the other members. The service tax on the services is normally being discharged taking the abatement of 60%. The receiver of the service would have consider the tax paid by the sub-contractor (member) as cost as the benefit of cenvat would not be available when the tax is being discharged taking the benefit of abatement. The customer in this case would end up paying service tax twice on the same amount as the agents are barred from availing the cenvat credit paid by the sub-contractor. Alternatively as is more possible in the competitive world the service provider to the industry would absorb the same.  

3. As most of the operators are operating in an unorganized environment, where the knowledge level about the taxes would be very minimal and it would not be economically feasible to appoint a consultant for day to day activities. Therefore, the cost of compliance is an added cost in addition to compliance.

ISSUES

Whether there is a requirement to hold a valid license in order to be liable to Service Tax?

The definition of rent a cab operator has been amended in 1998 and till such time the levy was only on a person who held a valid license. Under the present provisions there is no such requirement.

Whether buses are liable?

Up to 01.06.2007, motor cabs and maxi cabs alone were covered under the definition and motor vehicles other than motor cabs and maxi cabs were not at all covered for levying Service Tax. However, w.e.f. 01.06.2007, the clause relating to motor vehicles more than twelve persons was inserted to expand the scope of the levy under this category.

Whether the CENVAT Credit of excise duty paid on motor vehicles is available where the operator does not own the vehicles?

No. CENVAT Credit on such vehicles as capital goods might not be available as the definition of capital goods under CENVAT Credit Rules, 2004 requires vehicles to be registered under the name of the service provider.

Whether the availing of excise duty or additional duty of customs credit on the vehicles can be beneficial?

Where the service receiver is eligible for the credit then the rent a cab operator can avail the credit on the vehicles and use the credit to pay his Service Tax liability. This can allow him to reduce the cost of his service or enable him to enhance his profitability.

Whether ownership of the cab is a pre-requisite?

No. the statutory definition of ‘rent-a-cab scheme operator’ uses the words ‘renting of cabs and does not stipulate that the cab must be owned by the operator. This view was affirmed in the case of Transport Solutions Group v. CCE (2006) (Mum – CESTAT). An operator can hire out a car and then rent it out to a third party. Even in such situation, as long as the operator is engaged in the business of renting of cabs, he will be treated as a ‘rent-a-cab scheme operator’. Similarly, the owner of the cab in such situation will also be treated as ‘rent-a-cab scheme operator’ provided he satisfies the test of being engaged in the business of renting of cabs.

Tour Operators – Service Tax

INTRODUCTION

The levy of service tax was introduced on “tour operators”, with effect from 01.09.1997. The levy was exempted, vide Notification 52/98 ST Dated 18.07.98 and this exemption was in force upto 31.03.2000. As such, “tour operators” are liable for payment of service tax, with effect from 01.04.2000. Of late, the Department is holding that buses which are given on hire basis to various companies to ferry their personnel either within the city limits or even covering sub-urban areas would be liable to pay service tax under the category of tour operators. Reliance is placed by the department on the definition of the term “tour”.

The term tour operator covers any person who holds a tourist permit in respect of any vehicle. The service tax on tour operators is on operators who run / operate a tour on a motor vehicle provided that the tour operator holds a tourist permit under the Motor Vehicles Act, 1988 in respect of any motor vehicle. Service tax will be chargeable on all domestic and inbound tourist service provided by a tour operator holding a tourist permit. Service tax will also be chargeable on journeys / tours undertaken by tourist taxis and tourist buses (which also hold tourist permits) within and outside the State where they have been registered as tourist vehicles.

The tour operator can be a self-employed, single vehicle owner individual or a well organized firm providing a vast range of professional service in the field of tourism whether organized as a sole proprietorship / partnership a private or a public limited company. 

STATUTORY DEFINITIONS

6. As per section 65 (105) (n) “Taxable Service” means any service provided or to be provided to any person, by a tour operator in relation to a tour.

7. As per section 65 (113) "Tour" means a journey from one place to another irrespective of the distance between such places.

8. As per section 65 (114) "Tourist Vehicle" has the meaning assigned to it in clause (43) of section 2 of the Motor Vehicles Act 1988 (59 of 1988).

9. As per section 65 (115) “Tour Operator” means any person engaged in the business of planning, scheduling, organizing or arranging tours (which may include arrangements for accommodation, sightseeing or other similar services) by any mode of transport, and includes any person engaged in the business of operating tours in a tourist vehicle or a contract carriage by whatever name called, covered by a permit, other than a stage carriage permit, granted under the Motor Vehicles Act, 1988 (59 of 1988) or the rules made there under;

Explanation: - For the purposes of this clause, the expression “tour” does not include a journey organized or arranged for use by an educational body, other than a commercial training or coaching centre, imparting skill or knowledge or lessons on any subject or field.

10. As per section 2 (43) of the Motor Vehicles Act, 1988 a “tourist vehicle” means a contract carriage constructed or adapted and equipped and maintained in accordance with such specifications as may be prescribed in this behalf.

From the above statutory position, it can be reasonably inferred that, every vehicle registered under the “Contract Carriage” cannot be treated as a “Tourist Vehicle” unless such vehicle is “in accordance with such specifications as may be prescribed in this behalf”. As per Rule 128 of Motor Vehicle Rules, 1989 a number of specifications in respect of dimension, structure, door, lighting, seating, public address system so and so forth have been prescribed and only those vehicles, which satisfies all these specifications needs to be treated as a “Tourist Vehicle” and not every vehicle that is plying under a “Contract Carriage”.

11. As per section 2 (7) of the Motor Vehicles Act, a “contract carriage” means a motor vehicle which carries a passenger or passengers for hire or reward and is engaged under a contract, whether express or implied, for the use of such vehicle as a whole for the carriage of passengers mentioned therein and entered into by a person with a holder of a permit in relation to such vehicle or any person authorized by him in this behalf on a fixed or an agreed rate or sum –
    1. On a time basis, whether or not with reference to any route or distance; or
    2. From one point to another;

And, in either case, without stopping to pick up or set down passengers not included in the contract anywhere during the journey, and includes 

a)    A maxi cab; and

b)    A motor vehicle notwithstanding that separate fares are charged for its passengers.

The essential ingredient of a contract carriage is that it plies under a contract for a fixed set of passengers, and does not allow any other passenger to board or alight from the carriage at will.

12. As per section 2 (40) of the Motor Vehicles Act, ‘stage carriage’ means a motor vehicle constructed or adapted to carry more than six passengers excluding the driver for hire or reward at separate fares paid by or for individual passengers, either for the whole journey or for stages of the journey.

This definition makes it clear that the carriages running under the public transport system fall under the category of ‘stage carrier’, since the passengers have a right to board or alight from such carriages according to their choice and convenience, and such passengers individually pay the fares for the journey.

SCOPE

The scope of the taxable service covers any service provided or to be provided by a tour operator to any person in relation to tour.

Tour does not include any journey organized or arranged for use by an educational body, other than a commercial training or coaching centre, imparting skill or knowledge or lessons on any subject or field. Also the schools running transport services for students are not liable for service tax (vide Circular No. 137/70/2007 – CX – 4 dated 26.04.2008).

Further the following activities could be covered under the tour operator service:

1. Out bound tour: It shall be taxable if the consideration is received in INR. If the conditions specified in the Export of Service Rules, 2005 are satisfied then no service tax would be applicable.
2. Booking Hotel Rooms: In case of hotel booking the following kinds of arrangements could be possible:
   1. The service provider books the hotel accommodation and collects the gross amount including cost of the accommodation and service charges from the customer.

Here it should be noted that hiring or renting of car would be covered under rent-a-cab service.

VALUATION:

Service tax is payable on the gross amount charged by the service provider for the services provided.

ABATEMENTS UNDER NOTIFICATION  NO. 1/2006 – ST dated 1.3.2006

The notification provides various abatement schemes as discussed below:

1. In case of services in relation to package tour, 75% abatement on the gross amount charged is available. There is a condition that the bill issued must indicate that the gross amount charged is inclusive of charges for such tour.
2. In case of services solely of arranging or booking accommodation, 90% abatement on the gross amount charged is available. There is a condition that the bill issued must indicate that the gross amount charged is towards accommodation. Abatement is not available in case the amount charged is only for service charges and does not include cost of the accommodation.
3. In case of services other than those specified in (1) and (2), 60% abatement on the gross amount charged is available. There is a condition that the bill issued must indicate that the gross amount charged is inclusive of charges for such tour.

The benefit of CENVAT Credit shall not be available in case where the abatement is claimed as discussed above.

EXEMPTIONS:

Basic exemption limit:

The service provider can avail the basic exemption limit if the aggregate value of the taxable service provided during the previous financial year has not exceeded Rs. 10 lakhs. A service provider who opts to avail this benefit and also satisfies the prescribed conditions and requirements need not pay Service Tax during the current year on the sum total of the first consecutive payments received during that financial year towards the gross amounts charged by the service provider for taxable services till the aggregate amount of such payments is equal to Rs. 10 lakhs.

The service provider using the brand name/trade name of another person and the service receiver liable to pay Service Tax under reverse charge mechanism are not eligible the basic exemption limit benefit.

Exemption has been granted to taxable services provided or to be provided to any person, by a tour operator having a contract carriage or tourist vehicles with a permit for inter-state or intra-state transportation of passengers, excluding tourism, conducted tours, charter or hire services, from whole of the service tax leviable thereon. (Notification No. 20/2009 ST)

ISSUES

Whether transport of employees is covered under tour operator service?

No. Transportation of workers not covered under business of planning, scheduling, organizing or arranging tours.

It was held in the case of CCE v. Diwivedi Travels (2008) 16 STT 63 (New Delhi – CESTAT)/ Remanan Travels v. CST (2007) 25 STT 129 (Ban. – CESTAT) that since the assessee was not engaged in planning, scheduling, organizing or arranging tours and had only provided transport, liability of assessee to service tax under tour operator service found by lower authorities was not in accordance with law.

In the case of Prakash & Poonam Tours and Travels v. CCE (2009) 23 STT 28 (New Delhi – CESTAT) in context of transport of employees in bus, it was held that since there was no cogent evidence that assessee was engaged in business of operating tours,  assessee could not be brought under category of tour operator.

Whether the providing of tourist vehicles for airport/pick up or local travel as per the needs of the corporate/client or employees pick up and drop service constitute a “tour”?

The service cannot be called a tour. Tour involves planning, scheduling and the operator is having responsibility and control in the event. In these cases he only drives them from one point to the other like a local taxi or auto rickshaw.

Whether tourist permit by the tour operator is a pre-requisite for taxability?

No. Presently the vehicle in which the tour is conducted should be covered by tourist permit. That need not be in the name of the tour operator.

Where service provider books accommodation on behalf of customer and customer directly pays hotel is it covered under this category?

The service provider books the hotel accommodation on behalf of the customer. The customer directly makes the payment towards the cost of accommodation to the hotel and the service provider receives commission from the hotel. In such case the activity is taxable under business auxiliary services and the service provider is liable to pay service tax on the commission received.

This article provides a birds eye view of the provisions as applicable and the issues thereof in the light of the judicial decisions in regard to rent a cab operator as well as tour operators.

Madhukar N Hiregange FCA

Chartered Accountant