RQ | Uber, Meru and Service Taxes

The use of arbitrary barriers in regulation, like the Rs. 10 lakh limit on Service Taxes is counterproductive and can lead to a non-level playing field. More importantly such barriers encourage small-scale operations which can act against efficiency

A couple of months back, the Service Tax Department slapped a notice on Uber, demanding that the cab aggregation service pay service tax on its revenues. Cab services fall under the service tax net, and recently other cab service providers such as Meru and Mega have started adding a service tax component to their bills.

What queers the pitch in the case of Uber is who pays, and whether they pay at all. Uber claims to be an aggregation platform, bringing together cabbies and passengers, and says that it is the cabbies who are in charge of paying service tax on the revenues they make through the platform. From the Tax Department’s perspective though, going after thousands of cabbies demanding taxes is not very feasible, so they are trying to get Uber to pay the service tax.

More importantly, Service Tax becomes payable only if the annual revenues from the service cross Rs. 10 lakh and it is unlikely that too many of Uber’s cabbies will cross that threshold. So if we were to look at Uber strictly as an aggregator (which it actually is), it is unlikely that any service tax can be collected on its services!

What it also means that this gives platforms like Uber an unfair advantage over companies such as Meru which own their taxis – the latter’s revenue is much more than Rs. 10 lakh per annum and thus service tax has to be paid on the entire revenue! And this means that the playing field when it comes to taxi services is not level – for it is cheaper for an individual running a single taxi to offer service rather than a company offering a fleet.

This is similar to regulations in manufacturing that make it much more expensive (in terms of enhanced labour regulations and disclosures for companies beyond a certain size) for larger companies to operate vis-a-vis smaller ones. Even in the proposed relaxation of labour laws, a number of relaxations are to do with the minimum size of a company for doing the disclosures, and not with the easing of regulations themselves. All that it means is that just the threshold is raised – it becomes easier for companies to grow beyond their current levels of inefficiency, but they will soon hit a new level of inefficiency!

The problem for all this is the arbitrary fixing of slabs. An ostensible reason for fixing the minimum slab for service tax at Rs. 10 lakh is that enforcement for people earning less is going to be difficult. But as can be seen in the Uber case, this can lead to inefficient structures of industrial organisations, by keeping them small, and is hence not prudent. The government would do well to remove such arbitrary numbers from its regulation!

The other thing about service tax is that once your income crosses Rs. 10 lakh, you pay service tax on your entire income rather than the excess over 10 lakh, which is how income tax is structured. This is again inefficient, for someone who is making Rs. 9.8 lakh is now dissuaded from taking new business since it can literally subtract value! Another reason for arbitrary barriers to go.