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.

Meru’s pricing strategy

Let’s assume I’m writing this post two weeks back when Uber, Ola and TaxiForSure were still running successfully in most places in India. Since then, they’ve been banned to various degrees and it’s gotten harder for customers to get them and for drivers there to find customers leading to a sharp drop in volumes.

Thanks to the entry of app-based taxi booking services such as Uber, Ola and TaxiForSure, entrenched players such as Meru Cabs and Easy Cabs started losing business. This is not unexpected, for the former operated at around Rs. 13-15 per km range (depending on discounts, time of day, etc.) while the latter operated around the Rs. 20 per km price point. This meant that for immediate trips and mostly intra-city movement consumers eschewed the likes of Meru and embraced the likes of Ola.

In the last few weeks I’ve spoken to taxi drivers (mostly Uber; Ola drivers don’t inspire much confidence and so I don’t indulge them in conversation; and I’ve never got a cab via TaxiForSure) who have been affiliated to more than one aggregator, and from that I get what the problem with Meru’s pricing is.

What sets apart Meru, KSTDC and Mega Cabs is that the three are the only operators with a license to pick up passengers from the taxi rank at the Bangalore Airport. Any other taxi that you might book (Ola or Uber or a local cabwallah) don’t have the rights to pick up passengers there and park in the airport’s taxi parking zone. They instead have to park in the space allocated to private cars, paying the parking fees there, and  there is usually a delay from the time when the driver meets the customer at the arrival gate to the customer actually getting into the car. This distinction means that the likes of Meru and Mega offer superior service to the other operators at the airport and thus can command a premium price. Getting into anecdata territory but I always prefer to get a cab from the taxi rank (though the queue occasionally gets long) than to book a cab for which I’ve to wait.

At the city end, the difference between Meru and Uber (Ola is in an intermediate state) is that you can pre-book a Meru, while Uber only accepts “spot bookings”. This difference in service levels means that you can never be assured of getting an Uber at the time you want to leave for the airport – there is a statistically high chance of getting one but you don’t want to take the risk, and thus prefer to pre-book a Meru or a Mega, which lets you know at the time of booking if they are able to service you.

Now, this guarantee from a Meru or a Mega comes at a cost. An Uber cabbie who also drove for Easycabs told me that Easycabs would allocate his trip an hour before it was scheduled to start. Since Easycabs would have assured the customer of a cab reaching his place at the appointed time, this means that they need to account for a sufficient buffer to ensure that the cab does reach on time. Thus the allocation an hour in advance. This cabbie told me that from his point of view that was inefficient, for in the one hour of buffer that EasyCabs would add, he could complete one additional trip through Uber!

So it is clear as to why Meru is more expensive than Uber/Ola – their pre-booking provision means that they have to potentially ground your cab for an hour before pickup, and there is a license fee they have paid the airport for the right to pick up passengers from the taxi rank there. Notice that both these factors also result in increased convenience for passengers. So effectively, Meru is justified in charging a premium. The question is if the current structure is optimal.

The problem with Meru is that their fare structure doesn’t appropriately represent cost. A pre-booked taxi costs as much as a taxi hailed at the time of demand. A taxi from the airport (where they have paid license fee) costs as much as a taxi from anywhere else. So while their cost structure might be optimal for travel to and from the airport, the structure simply doesn’t work out for other rides. And they are getting priced out of non-airport rides.

Assuming that they want to get more non-airport rides for their fleet, how do they do it? The answer is rather simple – let the fare structure reflect cost. Rather than tacking on every piece of cost to the per kilometer fare, they can have a multi-part fare structure which is possibly more “fair”.

A typical trip from the airport to the city is about 40 km, and costs around Rs. 800 (excluding service tax). Instead of charging Rs. 20 per trip, how about charging Rs. 16 (Ola’s rate) per kilometer and an additional Rs. 200 “airport charge”? At the other end, how about charging an additional Rs. 100 or Rs. 200 as pre-booking charge in order to account for driver’s idle time on account of the pre-booking? If they were to charge this way, they will both make as much money as they currently do on airport trips, and also compete with Ola and Uber on intra-city immediate-ride trips.

To take an extreme analogy, this is like asset-liability management – prudent banking dictates that the term structure of your assets reflects that of your liabilities. Similarly, prudent pricing (to the extent it is practically implementable) dictates that your price structure reflects on your cost structure!