Divisive ride-sharing service Uber is set to be legalised by the NSW government under drastic reforms to the taxi industry.

The new laws set to be announced by Transport Minister Andrew Constance next month will require Uber drivers to pay for a licence for the first time while taxi owners will be compensated for losing control of the market, The Daily Telegraph reports.

However, Uber drivers will not be allowed to compete with cabbies for "rank and hail" services.



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The measures will increase costs for Uber drivers while reducing the costs of entering the taxi industry.

The reforms will also lead to tighter control of who can become an Uber driver with those with criminal records banned from obtaining a licence.

Uber vehicles will also be required to undergo regular safety inspections.

Government sources have reportedly described the changes as "inevitable".

While taxi drivers are set to be compensated for Uber's entry into the market the amount of compensation and how it will be refunded are yet to be determined.