India is recognized as the third-largest digital economy globally, with Prime Minister Modi championing digital innovation and promoting the development of world-class "Made in India" apps. As the creation and usage of these apps continue to grow in India, the associated tax liabilities would not be left behind. The recent ruling of the Authority for Advance Ruling (AAR) Karnataka in Rapido1 is a case in point. Our article discusses in particular, GST implications on the commission free monetization model.
Relevant provisions of GST law
GST law lays down distinct obligations for entities which qualify as an "electronic commerce operators" ("ECOs"). ECOs such as Amazon, Flipkart, etc. which are responsible for collection of consideration are required to separately register as an ECO and collect tax at source (TCS) @ 0.5% (earlier 1%) on supplies made through them. Separately, for ECOs facilitating specified type of services viz. passenger transportation service, restaurant services, accommodation services, and housekeeping services such as Uber, Zomato, Urban Company, it is mandatory to discharge GST on the value charged by the underlying service provider who is using the app [under Section 9(5) of the CGST Act read with Notification No 17/2017 -Central Tax(Rate) dated 28.06.2017]. In simple words, ECOs such as Zomato, Uber, etc. are liable to pay GST under the reverse charge mechanism for the services provided through them to the customers and such ECOs do not have the TCS obligation like other ECOs.
Various business models of Apps
Different apps adopt different business models such as the "market place electronic commerce" model, the "fulfillment electronic commerce" model, the "hybrid electronic commerce" model or the "commission-free monetization" model. While applicability of GST in other models adopted by established players such as Amazon, Flipkart, Urban Company etc. is simpler to determine, the applicability of GST on the "commission-free monetization" model is more difficult to discern.
In this model, typically an app is built which helps to link consumers with service providers whilst maintaining a safe digital ecosystem for both parties. The app acts as a service provider's hub, where the service provider has absolute ownership of their supply and the app entity has no right over the supply. The supplier/ service provider can register on the app by making payment of membership/ subscription fee/ usage fee. While the app entity pays GST on the subscription/usage fees that it charges from the suppliers, the question that arises is whether the app entity is also required to discharge GST on the value of the underlying business transactions undertaken between the customers and sellers/suppliers who are connected by the app.
Recent Ruling in Rapido's case
The commission free monetization model has been analysed in the recent ruling of AAR Karnataka in Rapido. The ruling comes to the conclusion that Rapido was required to discharge GST as a deemed supplier of services under Section 9(5) of the CGST Act.
The said ruling was issued in the context of Roppen Transportation Services Ltd, which proposed to provide computer/mobile application services to independent four-wheeler cab service providers i.e. drivers on subscription basis, as a discovery platform to enable them to connect with potential passengers. The drivers were required to pay a subscription fee to the Company.
The ruling interprets the phrase "services supplied through electronic commerce operator" under Section 9(5). It has been held that, even in cases where the app developer itself is not directly involved in the process of deciding the fares/routes or otherwise planning, and more importantly not involved in collection of consideration through it, it would be understood that the services are provided "through" it.
Other rulings on the issue
Ruling in Rapido may however be compared to the below rulings of the AAR and Appellate AAR ("AAAR") in a similar business model i.e. commission-free monetization model also involving ride-hailing services through apps/ website:
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Rulings which held that E-commerce operators are not liable to pay GST under Section 9(5) |
Rulings which held that E-commerce operators are liable to pay GST under Section 9(5) |
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Multi-verse Technologies Pvt. Ltd. (Karnataka AAR, involving the Super app Myn) Juspay Technologies Pvt. Ltd. – (Karnataka AAR, involving "Namma Yatri" app on ONDC platform) Key facts based on which ruling was given: · The platform merely connected the drivers with the passengers. · The platform was no privy of contract. · No consideration was collected by the platform. · The platform has no control over actual provision of service · No details of the ride were shared by the platform. · No control room/call centre. · No trip commission was charged by the platform from taxi drivers. · Not registered with the regional transport office (RTO) as a rent-a-cab aggregator |
Opta Cabs Pvt. Ltd. (Karnataka, AAAR) Key facts based on which ruling was given: · Potential customer would book the taxi by using the app · Taxi operator would be intimated about the potential customer through the app · On completion of the journey, the app sends an invoice to the customer · The ruling emphasized that booking for a taxi ride on the Company's app is the first step towards the supply of the service, even though no consideration is paid to the Company. Without the booking, no service can be provided by the taxi operator. · The ruling also emphasized that for Section 9(5) to apply, it is not necessary that the consideration for the supply is collected by the app. |
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Balat Enterprises Pvt Ltd (Tamil Nadu AAR) (in relation an app called Vyavshay which linked small businesses to consumers) Key facts based on which ruling was given: · User may select the type of service they require, and the specific location and date/time when they require the service, through the app. · The app books the service. Throughout the booking process, users receive detailed information about service rates and availability in their local area · Based on the booking, the service provider reaches the location of the customer to render the service · Users/service providers are prohibited from connecting with each other than through the app · User/service provider can give feedback/ratings for each other on the app |
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Ruling in Rapido's case (Karnataka AAR involving Rapido app) Key facts based on which ruling was given: · App sends information about specific ride route to drivers · Driver offers fares through the app · Fares are negotiated through the app · After acceptance of fares, the location of passenger is forwarded to the driver through the app · App captures the initially agreed fare for the ride · Pick up location is shared to the driver through the app, · App notifies the passenger about the arrival of the driver, etc. · Route is displayed through the app |
From an analysis of the above rulings, it emerges that the apps which merely connect the service providers/ suppliers with customers would not be liable for the discharge of tax liability under section 9(5). However, if the app is also used for other activities, for e.g. in case the booking and the invoice is done/generated through the app or if details of geo-location of supplier/customer is shared through the app etc, then Section 9(5) may become applicable.
Implications of applicability of Section 9(5) for the ECO
Once Section 9(5) gets triggered, not only is the app entity required to pay GST for underlying services supplied through the app, it also has to undertake the concomitant compliances. These include monthly reporting of supply in GSTR 1 and GSTR 3B and issuance of the GST invoice for underlying services. Also, importantly, the ECO would be required to pay the entire GST liability under Section 9(5) in cash and no ITC can be utilised for payment of such GST as has been clarified by CBIC Circular dated 190354/207/2021-TRU dated 17th December, 2021.
Ambiguity and more ambiguity
The variety of rulings have resulted in much ambiguity on the issue and several app-based service providers are seeking clarity on their GST obligations. Certain industry leaders have also approached the AAR and Ministry of Finance to provide guidance and resolution regarding taxation of their services.
Overall, the rulings seem to be a wake-up call for businesses developing apps, especially when the apps work on a "commission free monetization" model and where one or more of services offered on the app are Section 9(5) services (i.e. passenger transport service, restaurant service, accommodation services and housekeeping services). Each business needs to dissect their individual and unique facts to evaluate their liability as deemed supplier in terms of Section 9(5).
Footnote
1. In Re: M/s. Roppen Transportation Services Pvt. Ltd. – KAR ADRG 36/2024 dated 24th July 2024.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.