By treating ‘discoverability’ as ‘order fulfilment’, the Authority has stirred the micro question on taxation and macro questions around how India can distinguish itself from the rest of the world in reaping the welfare dividend of the digital economy.
Two different models
Let us first understand the difference between providing tech services to get discovered versus fulfilling an order in an online marketplace.
A platform has at least two sides, connecting users on both sides. In the case of ride-hailing apps, these are the drivers and the riders.
In the first scenario, a SaaS platform charges drivers an agreed-upon subscription fee. This fee allows riders to find drivers while freeing the drivers from paying a per-ride commission, offering a different value proposition.
In contrast, a fulfilling marketplace, such as an e-commerce platform, goes beyond mere discoverability. It helps sellers connect with buyers, manage payments, organise logistics for delivering products or services, record customer feedback or ratings, and handle consumer complaints, providing a comprehensive transaction ecosystem.
For the subscription model, the applicability of GST is limited to the service charge directly tied to discoverability—specifically, the subscription fee paid by drivers to access the platform’s services. This fee is treated as the taxable amount under the GST framework, making it clear that the tax applies only to the drivers’ subscription payments.
Marketplace model
For the marketplace model, GST extends to the entire value chain, encompassing both the charge drivers pay to the SaaS platform for its services and the charge paid by riders to drivers for the ride. This broader application reflects the comprehensive role of the platform in facilitating the transaction.
By distinguishing these components, the scope of GST in each business model becomes more apparent, addressing the potential confusion over whether the tax applies narrowly to service charges or broadly to the entire transaction amount.
The GST Act of 2017 and its rules define both e-commerce and e-commerce operators. However, the two advanced rulings in Karnataka demonstrate inconsistency in applying these definitions. A consistent and nuanced approach ensures India’s GST policy supports economic growth. Such an approach would allow differentiation between business models, enabling the Indian economy to maximise welfare benefits.
Building inclusiveness
In the absence of official statistics, a review of available data reveals that at least two crore drivers can participate in the ride-hailing mobility market (including cars, auto rickshas and bikes) in India.
Each of the top three ride-hailing apps currently has 13 lakh active driver-partners, 11 lakh and about four lakh auto drivers on their respective platforms. One must also consider that the same drivers often use many apps. Hence, arithmetic may seem to be perplexing.
The policymakers must not lose sight of two additional factors: the EV revolution, which is adding approximately 11,000 vehicles every month, and the potential of incorporating women drivers to support the goal of women-led economic growth as outlined by Prime Minister Modi.
Given the back-of-the-envelope calculations, 1.5 – 1.7 crore drivers can join the ride-hailing mobility market. To make it happen, we need to get our GST policy right.
Lowering the cost of mobility
Inflation and reducing middle class have been the latest buzzwords in the Indian pink press in the last few weeks. Amidst these reports, the government would naturally like the cost of mobility, which forms a significant component of the cost of urban living, to stay moderate.
A linear formula to achieve that goal would be to find ways to limit the cost of participation in the ride-hailing mobility market for drivers. Greater driver participation in mobility markets is more likely to reduce the cost of rides, and the SaaS model would serve that goal better than the commission-per-ride model.
Weather-proof digital economy
A third macro and long-term goal is to build a competitive digital economy in India. The Prime Minister has stated that the Indian digital economy must be “democratic” and “accessible” to all.
While the world is grappling with the problem of sticky market power and contemplating enacting ex-ante digital competition laws, India’s approach has been distinct. With several shining examples of market-based solutions such as NPCI (digital payments) and ONDC (e-commerce), it is time that the (market power) pain-relieving power of the SaaS model be allowed to provide a countervailing market force in app-based ride-hailing markets.
A Fit-for-purpose GST Policy
The GST Council needs to recognise the distinct business model innovations that enable income for many and hit inequality directly. By treating SaaS and order fulfilment apps as identical, the GST regime would deprive the Indian economy of the benefits of such business model innovation. The GST Policy will become an instrument of Viksit Bharat by considering the welfare outcomes instead of focusing just on the business structures.
The Indian state is inching towards spend and tax policy under the weight of competitive politics. Here is an opportunity to get the GST policy right and nudge towards the right taxation while letting people earn and spend.
—The author, Dr Navneet Sharma, is a competition policy expert. The views are personal.
