Service Tax on Rent-A-Cab Service

1. Definition and Scope of Rent-A-Cab
Service
1.1 What is Rent- A-Cab Service?
Rent-A-Cab Service means renting of any
motor vehicle designed to carry passengers!!!
1.2 What??? I haven’t heard or read such
a definition anywhere?
Correct, but let me explain – As per
Finance Act, 1994 the relevant definitions contained in Section 65 are as
follows:
Section 65(105)(o) – ‘taxable service’
means any service provided or to be provided “to any person, by a
‘rent-a-cab scheme operator’ in relation to the renting of a cab.”
Section 65(91) – “rent-a-cab scheme
operator
means any person engaged in the business of renting of cabs.”
Section 65(20) – Cab means –
(i) a motorcab, or
(ii) a maxicab, or
(iii) any motor vehicle constructed or
adapted to carry more than twelve passengers, excluding the driver, for hire or
reward: Provided that the maxicab referred to in sub-clause (ii) or motor
vehicle referred to in sub-clause (iii) which is rented for use 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.”
Section 65(71) read with Section 2(25) of
Motor Vehicle Act, 1988, “motor cab means any motor vehicle constructed
or adapted to carry not more than six passengers excluding the driver for hire
or reward.”
Section 65(70) read with Section 2(22) of
Motor Vehicle Act, 1988, “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.”
Section 65(73) read with Section 2(28) of
Motor Vehicle Act, 1988, “motor vehicle or vehicle means any mechanically
propelled vehicle adapted for use upon roads whether the power of propulsion is
transmitted thereto from an external or internal source and includes a chassis
to which a body has not been attached and a trailer; but does not include a
vehicle running upon fixed rails or a vehicle of a special type adapted for use
only in a factory or in any other enclosed premises or a vehicle having less
than four wheels fitted with engine capacity of not exceeding thirty-five cubic
centimetres.”
However, as per Notification No.
20/2012-ST dated 05-06-2012
, the provisions of Section 65 shall not apply
with effect from 01.07.2012. It means, in the Negative List regime, the
definitions contained in Section 65 are no longer applicable for service
provided or agreed to be provided on or after 01.07.2012. The new definitions
are contained in section 65B of the Finance Act, 1994 which do not define
‘Rent-A-Cab’ or any similar service.
1.3 How rent-a-cab service has been
defined at Answer to Q. 1.1 above?
For the purposes of abatement and reverse
charge mechanism, the service of ‘renting of motor vehicle designed to carry
passengers’
has been specifically provided. And as per rules of
interpretations under section 66F(2), where a service is capable of
differential treatment for any purpose based on its description, the most
specific description shall be preferred over a more general description. So,
the definition given at answer to Q.1 is not the statutory definition, but
adopted for the sake of convenience to name such specific description. Also for
payment of tax, the accounting code ‘00440048’ of rent a cab operator service
is the most appropriate code for such service.
1.4 Who are covered under rent-a-cab
service?
Any person providing service of ‘renting’
of motor vehicle designed to carry ‘passengers’, which is not covered under the
negative list u/s 66D and also not exempted vide Notification No.
25/2012-Service Tax, dated the 20th June, 2012
is covered in the
description of rent-a-cab service. It can be clearly seen that renting of any
motor vehicle (and not just a cab/taxi) is included. It means it includes
renting of motor cars, motor cabs, maxi cabs, mini buses, buses and all other
motor vehicles which are designed to carry passengers, irrespective of its
passenger carrying capacity. The more meaningful description of this service
could be ‘Rent-A-Passenger Vehicle Service’ which is not provided in the listed
services. Also note that the vehicles like truck, trailer, dumper, etc designed
to carry goods are not covered by this description.
It is pertinent to mention that as per
declared service u/s 66E(f), the levy of service tax is attracted on transfer
of goods by way of hiring, leasing, licensing or in any such manner without
transfer of right to use such goods. This is because any transfer of right to
use goods is considered as ‘deemed sale’ as per Article 366(29A) of the
Constitution of India and the Central Government is not empowered to levy
service tax on such transactions. However, almost all the state governments
have levied VAT on such deemed sale. It means that any such activity of
renting, hire, lease, licence, etc would attract service tax or VAT, which are
mutually exclusive, depending on transfer of right to use as per facts and
circumstances of each transaction and based on judicial precedents.
The Hon’ble Supreme Court in the case of Rashtriya
Ispat Nigam Ltd.
held that ‘transfer of right to use goods’ involves
transfer of possession and effective control over such goods, but mere transfer
of custody along with permission to use or enjoy such goods, per se, does not
lead to transfer of possession and effective control. This being a completely
different and vast subject in itself, the author does not wish to elaborate
more of it here.
1.5 What is the meaning of ‘renting’?
As per Section 65B(41), “renting means
allowing, permitting or granting access, entry, occupation, use or any such
facility, wholly or partly, in an immovable property, with or without the
transfer of possession or control of the said immovable property and includes
letting, leasing, licensing or other similar arrangements in respect of
immovable property.”
The term renting has been defined above
in the context of renting of immovable property and the same definition can’t
be imported to interpret ‘renting of motor vehicle’. Hence, renting has to be
given its general and common usage meaning in the context of motor vehicles.
The meaning of ‘rent’ as per Oxford Dictionary is: (i) “Pay someone for the use
of (something, typically property, land, or a car).” (ii) “A sum paid for the
hire of equipment.”
1.6 Whether ownership of the vehicle is a
pre-requisite?
No. Even the erstwhile 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.
a) In case of Transport Solutions
Group Vs. CCE (2006)
,
the Tribunal, Mumbai held that there is no
requirement for a rent-a-cab scheme operator to own the vehicles which are
rented out.
b) In case of Ghanshyam Transport
Vs. CCE (2009)
, it was held that if a person is engaged in business of
engaging taxis for customers and giving them services without even owning or
plying vehicle, service tax is payable under ‘Rent-a-cab scheme operators’
service.
In the negative list regime, any service
other than in negative list or exempted is a taxable service. An operator can
take a vehicle on rent and then rent it out to a third party; he will be
treated as a rent-a-cab operator. Similarly, the owner of the vehicle in such
situation will also be treated as rent-a-cab operator when he renders service
of renting of motor vehicles.
1.7 Whether service tax is attracted when
the customer hires the vehicle on per KM rate basis, agreeing to some minimum
fare and where the driver as well as the fuel is provided by the service
provider?
Prior to 01-07-2012, i.e. in the positive
list approach of taxation, various courts held that such services are in the
nature of ‘transportation service’ provided to the customer wherein neither the
possession, not the control has been given to the customer and service tax not
attracted.
a) In the case of Kuldip Singh Gill
Vs. CCE
[2006(3) STR 689], [STO-2005-CESTAT-324] has observed
that the vehicle running on Kilometre basis are not liable to service tax.
b) In the case of RS Travels Vs.
CCE
[2008 (12) STR 27] [(2008) 15 STT 437 (New Delhi – CESTAT)],
where the Tribunal observed that the cab operator providing cab with driver for
going from one place to another either on Kilometre 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. Similar view was taken in the case of Surya Tours & Travels
Vs. CCE [2008 (10) TMI 123 – CESTAT, NEW DELHI]
.
c) Further, in the case of Cochin
International Airport Prepaid Taxi Operators Co-op society
[2008
(16) STT 190]
, 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.
However, all these judgement are with
respect to ‘rent a cab scheme operator’ service which had a statutory
definition u/s 65(91) and is no more applicable in the negative list regime. In
author’s view, all such services which were earlier termed as ‘transportation
service’ are now liable to service tax as rent-a-cab service.
2. NEGATIVE LIST
2.1 What types of Rent-A-Cab services are
not taxable?
The service of transportation of
passengers with or without accompanied belongings by a stage carriage; and
metered cabs, radio taxis or auto rickshaws are covered in the negative list,
hence not taxable.
As per Section 65B(40) “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”
As per Section 65B(32) “metered cab means any contract carriage on which an
automatic device, of the type and make approved under the relevant rules by the
State Transport Authority, is fitted which indicates reading of the fare
chargeable at any moment and that is charged accordingly under the conditions
of its permit issued under the Motor Vehicles Act, 1988 (59 of 1988) and the
rules made there under”
The term ‘radio taxi’ has neither
been defined in the Finance Act, 1994 nor in the Central Excise Act, 1944 or in
any rules framed there under. However, the intention could be to exempt radio
taxis operated by operators who obtained licence under any scheme, in this
behalf, framed by the state government u/s 74 and other provisions of the Motor
Vehicle Act, 1988. In general, but not necessarily, the main features of radio
taxis are:
The vehicle should be fitted with
electronic fare meters on the front panel.
The vehicle should be fitted with
GPS/GPRS based tracking devices which must be in constant communication with
the Central Control unit while the vehicle is on duty.
 The vehicle should be equipped with a
mobile radio fitted in the front panel for communication between driver and the
main control room of the licensee.
On the roof of the vehicle there should
be an LCD board to display that the vehicle is a radio taxi.
The scheme may provide for minimum fleet
size, say 100 cabs for making application for licence under the scheme.
The scheme may also prescribe the manner
in which the fare is to be charged.
3. EXEMPTION
3.1 Whether ambulance service provided by
hospitals is exempted?
Yes, as per entry no. 2 of mega exemption
Notification No. 25/2012-ST dated 20-06-2012, health care services, which include
services by way of transportation of patient to and from a clinical
establishment
is exempted. Also, as per clarification given by CBEC vide
Letter F. No. 334/1/2007- TRU dated 28-02-2007, ambulances are not meant for
carrying passengers for hire or reward. Hence, service tax liability does not
arise on renting of ambulances.
3.2 Whether services provided to an
educational institution including schools, colleges and universities by way of
transportation of students, faculty or staff is exempted?
Yes, as per entry no. 9 of mega exemption
Notification No. 25/2012-ST dated 20-06-2012, auxiliary educational services,
which include services relating to transportation of students, faculty or staff
of such institution is exempted.
3.3 Whether services provided by an
educational institution including schools, colleges and universities by way of
transportation of students, faculty or staff is exempted?
The exemption was given under the above
entry no. 9 which has been withdrawn w.e.f. 01-04-2013. However, as per entry
no. 23 of mega exemption Notification No. 25/2012-ST dated 20-06-2012, service
of transport of passengers, with or without belongings, by a contract carriage
for the transportation of passengers, excluding tourism, conducted tour,
charter or hire
is also exempted.
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–
a) On a time basis, whether or not with
reference to any route or distance; or
b) 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. The transportation service provided by educational institutions is in the
nature of contract carriage and hence exempted. Moreover, this exemption is not
restricted to educational institutions but can be availed by any ‘contract
carriage’.
3.4 Whether any other exemption is also
available?
As per entry no. 22 of mega exemption
Notification No. 25/2012-ST dated 20-06-2012, services by way of giving on
hire – (a) to a state transport undertaking (as defined in section 2(42) of
Motor Vehicle Act, 1988), a motor vehicle meant to carry more than twelve
passengers; (b) to a goods transport agency, a means of transportation of goods
;
is exempted.
4. REVERSE CHARGE MECHANISM
4.1 When is Reverse Charge Mechanism –
RCM applicable for Rent-A-Cab Service?
As per Section 68(2) of the Finance Act,
1994, the Central Government is empowered to notify such services on which the
liability of pay service tax shall be on the service receiver to the extent
specified, instead of service provider. The Central Government has issued Notification
No. 30/2012-ST dated 20-06-2012
and RCM is also applicable on Rent-A-Cab
service if all the following conditions are fulfilled:
5. Illustrations
under various situations to show whether reverse charge mechanism is applicable
or not, assuming that both the service provider and service receiver are located
in the taxable territory.
6. ABATEMENT
6.1 When is abatement available for
Rent-A-Cab Service?
As per Sr. No. 9 of Notification No.
26/2012-ST dated 20-06-2012
, abatement of 60% is available on Rent-A-Cab
Service i.e. service of renting of any motor vehicle designed to carry
passengers. It means service tax is payable on only 40% of the value of
Rent-A-Cab service. The abatement is subject to the condition that the
Cenvat Credit of inputs, capital goods and input services, used for providing
the taxable service, has not been taken under the provisions of Cenvat Credit
Rules, 2004.
If the service provider avail cenvat credit on any input,
capital good or input service, used for providing rent a cab service, then
abatement is not available.
7. CENVAT CREDIT
7.1 Whether Cenvat Credit is available on
Rent-A-Cab Service?
The Hon’ble Karnataka High Court in the
case of CCE Vs. Stanzen Toyotetsu India (P) Ltd. [(2011) 32 STT 244
(Kar.)]
held that the transportation/Rent-a-Cab service is provided by the
assessee to their employees in order to reach their factory premises in time
which has a direct bearing on manufacturing activity. In fact, the employee is
also entitled to conveyance allowance which would form part of his condition of
service. Therefore, by no stretch of imagination it can be construed as a
welfare measure by denying the availment of Cenvat credit to the assessee for
providing transportation facilities as a basic necessity which has a direct
bearing on the manufacturing activity.
This decision was again followed by the
same court in the case of CCE Vs. Tata Auto Comp Systems Ltd. CEA No. 132 of
2009.
But, w.e.f. 01-04-2011, the Central
Government has amended the definition of ‘input service’ under Rule 2(l) of
Cenvat Credit Rules, 2004 vide Notification No. 3/2011 – CE(NT) dated
01-03-2011
and again vide Notification No. 18/2012 – CE(NT) dated
17-03-2012 (w.e.f. 01-04-2012). The effect of the amendment is that rent-a-cab
service has been specifically excluded from the definition of ‘input service’
and hence cenvat credit is generally not available. Cenvat Credit is available
only when rent a cab service could be related to a motor vehicle which is capital
good for them. In other words, when a motor vehicle designed to carry
passengers including their chassis, registered in the name of provider of
service, when used for provided output service of- (i) transportation of
passengers; or (ii) renting of such motor vehicle; or (iii) imparting motor
driving skills, then cenvat credit can be availed.
8. EFFECTIVE RATE OF SERVICE TAX
8.1 What is the effective rate at which
service tax is payable by Service Provider?
8.2 What is the effective rate at which
service tax is payable by Service Receiver?
The service receiver shall pay service
tax @ 4.944% (i.e. 12.36% of 40% Value) only when reverse charge is applicable.
His liability to pay service tax is not affected by cenvat credit availed or
not availed by the service provider. When RCM is not applicable, service
receiver is not required to pay any tax.
9. Below is the Flow Chart of effective
rate of service tax payable by service provider and service recipient under
various situations:
POINTS TO NOTE:
1. When the service provider has not availed any cenvat credit,
i.e. when abatement is available, then the service tax is payable @ 4.944%
either by provider or receiver depending of applicability of RCM.
2. When the service provider has availed any cenvat credit, i.e.
when abatement is not available, then the total service tax is payable @ 12.36%
by provider or jointly with receiver depending of applicability of RCM.

3. As far as service receiver is concerned, he shall pay @
4.944% only, irrespective of abatement, only when RCM is applicable.
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