Budget 2015-16 made a change in service tax provisions to cover “aggregator” under the service tax net The term “aggregator” has been defined under Service Tax Rules, 1994 as “a person, who owns and manages a web-based software application, and by means of the application and a communication device, enables a potential customer to connect with persons providing service of a particular kind under the brand name or trade name of the aggregator”.
In addition, a corresponding change was made in the meaning of the term “person liable to pay service tax” in the Service Tax Rules, 1994 to include the term “aggregator”. The relevant extract is as follows: “in relation to the service provided or agreed to be provided by a person involving an aggregator in any manner, the aggregator of the service: - Provided that if the aggregator does not have a physical presence in the taxable territory, any person representing the aggregator for any purpose in the taxable territory shall be liable for paying service tax; - Provided further that if the aggregator does not have a physical presence or does not have a representative for any purpose in the taxable territory, the aggregator shall appoint a person in the taxable territory for the purpose of paying service tax and such person shall be liable for paying service tax.”
The intention to bring the category mentioned above under the tax net stems from the fact that there are a few web-based service providers, offering services such as taxi bookings, hotel bookings, etc. without being present in India/being present through a representative. Such web-based providers do not pay service tax on any activity undertaken in India on grounds that either the service provider who actually provides the service to the customer is liable to pay it or the service itself is exempt. Furthermore, in other such cases, service providers with a presence in India do not pay service tax as it is charged by the actual service provider. The issue here could be that though such service providers could have charged service tax, it may not have been deposited on a timely basis. It is difficult to get a hold of such service providers because they are unorganised and do not have a fixed place of operations such as cab service providers.
The term “aggregator” implies that there should be a web-based software application and a communication device to connect potential customers with the service providers to provide services under the brand name/trade name of the person owning the software application. In other words, the intention appears to cover transactions in which service providers service their customers while being connected through communication devices to a person who owns and manages a web-based software application.
It is not clear whether this is a new levy for businesses or a mere shift in the payment of service tax to the aggregator.
The change will affect e-commerce businesses that own and manage software applications. However, it seems that only service providers who provide services to customers would be covered under its ambit (provided the other conditions mentioned above are met). Suppliers who sell goods to customers on web-based software platform applications may not be covered as the term “aggregator” covers only service providers. Accordingly, e-commerce websites that connect customers with suppliers may not be covered by the term. It must be noted that in such a model, the e-commerce websites are usually paid in the form of a commission for the sales generated by the distributors for a particular period. This is liable to service tax under the current regime as this service is not specifically exempt.
However, there are businesses that connect service providers with prospective customers through web-based applications for services like travel, hotels, cabs, etc. The change in the provisions could have an impact on such businesses. To evaluate whether such businesses are covered within the ambit, the following must be considered:
• The arrangement between the service provider and the person owning the web-based software application; • Whether billing the customer is carried out by the service provider or the owner of the web-based software application; • If the billing is carried out by the service provider, how is the owner of the web-based software application remunerated – through fixed income or on a commission basis; • Whether the arrangement between the service provider and the owner of the web-based software application is on a principal-to-principal basis or principal-to-agent basis.
The response to the above will help businesses understand whether they can be regarded as aggregators under service tax and also help them align their structure, if required. Once a person is identified/regarded as an aggregator, the consideration/value of services on which service tax is to be levied/paid by the aggregator must be evaluated. Currently, the most common service where the aggregator model may be applicable is that of cab operators. We analyse the impact of the aggregator model on rent-a-cab services in two scenarios in the ensuing paragraphs. The scenarios consider the terms of agreement between the aggregator and the service provider as well as the flow of consideration to/by the aggregator.
Scenario I In this scenario, the aggregator acts in the capacity of a rent-a-cab service provider and raises invoices to the end customer for the entire travel fare (i.e. charge of INR 100). The aggregator appoints a cab operator (with his own car) for rendering cab services to the end customer. In such a situation, the aggregator pays remuneration to the cab operator for the services rendered by him (i.e. INR 90).
Implications • As the aggregator acts as a rent-a-cab service provider, it is liable to pay service tax on the consideration received from the end customer i.e. INR 100.
The aggregator may claim abatement, according to Notification No.26/2012-ST dated 20 June 2012. In our opinion, the aggregator will mainly provide cab services via radio taxis and can thus avail of the abatement benefit under Sr.No.9A. However, if the benefit of the abatement is availed by the aggregator under Sr.No.9A, the aggregator will not be eligible to claim CENVAT credit for any input, input services and capital goods. Thus, if the abatement is availed, the aggregator will have to either let go of the CENVAT credit benefit or vice versa. Accordingly, the business entity would have to analyse the impact.
However, if the aggregator is an individual, Hindu Undivided Family (HUF), partnership firm whether registered or not, including an association of persons, and if the end customer is a body corporate, then in that case the end customer is liable to pay service tax under the reverse charge mechanism.
• In light of the recent amendment in the Finance Bill, 2015, it appears that the aggregator will also be liable to discharge the service tax liability on the second stage of the transaction, in which the aggregator receives services from the cab operator on the value of INR 90.
In our opinion, if service tax is paid on a reverse-charge basis by the aggregator, CENVAT credit for input services should be admissible to the aggregator, since both the aggregator and the cab operator are engaged in the same line of business i.e. rent-a cab service. However, if the aggregator avails of the benefit of abatement under Sr.No.9A while discharging output liability, the aggregator is not entitled to claim CENVAT credit for the input service.
It must be noted that there is still no clarity whether the aggregator can avail of the benefit of abatement while discharging a service tax liability on INR 90. Moreover, the service tax paid on INR 90 by the aggregator may become a cost if the aggregator is not entitled to CENVAT credit. Thus, clarifications are awaited from the authorities on the valuation mechanism, particularly for the rent-a-cab industry.
Scenario II Here, the aggregator provides a web-based platform between the cab operator and the end customer and receives remuneration in the form of commission or a fixed income from the cab operator i.e. INR 10. The cab operator renders the rent-a-cab service to the end customer and charges him INR 100.
Implications • In this situation, the aggregator receives a commission of INR 10 and would be liable to collect and pay service tax on this amount. However, service tax levied on the commission may become a cost to the cab operator if the operator cannot avail CENVAT credit on it. • In the second stage of the transaction, the cab operator (an individual or HUF) renders rent-a-cab services to the end customer (an individual or HUF). According to the recent amendment to the term “aggregator”, and interpreting the literal meaning of the “person liable to pay service tax” as an aggregator, it appears that the aggregator is liable to pay service tax on the value of the service i.e. INR 100. • If the cab operator is an individual, HUF or partnership firm whether registered or not, including an association of persons, that render services to end customers who are body corporates, then the end customers would have to pay service tax under the reverse charge mechanism. • There could be a situation in which both the aggregator and the end customer could be liable to service tax on a particular transaction. In our opinion, this should not be the intention of the law. Accordingly, this needs to be addressed and clarified by the authorities at the earliest.
Given the various ambiguities in this matter, the industry expects the Central Board of Excise and Customs to issue clarifications on aspects such as valuation mechanism, eligibility to avail CENVAT credit and availability of the abatement provision to the aggregator. The authorities should also clarify if the newly introduced aggregator provision will apply in all circumstances or only in cases where the service provider is a non-body corporate.
In addition, considering the changes and the intention of the law, businesses must review their existing tax structures and the tax impact as it would affect cash flows, claim of service tax credits, etc. Businesses may also need to restructure and realign structures in order to ensure a simple tax structure.