Tax officials have to be less coercive
Going by the observations of the Delhi High Court in the arrest of a senior official of travel portal MakeMyTrip.com, the taxman’s tendency to be coercive doesn’t seem to have reduced. Last fortnight, the official was arrested for allegedly not paying R82 crore of service tax. The case has larger ramification for the entire e-commerce industry since, in this case, MakeMyTrip is arguing that the billing done to customers is largely on account of services they avail from either hotels or airlines, so the service tax on this has to be paid by the hotels/airlines—in the case of e-tailers, the argument they make is that VAT needs to be paid by the eventual sellers and not by them. Theoretically, there is an easy solution in asking e-commerce players to collect the tax and pay it to government, but there are several legal complications. If Amazon or Flipkart is to pay the VAT, for instance, this implies they are the sellers of goods—but under Indian law as it stands today, FDI cannot be allowed in B2C e-commerce. In the case of a travel portal like MakeMyTrip, if it collects the service tax on the entire transaction and deposits this with the government, this implies it is the owner of the hotel/airline as well. Also, if it is a hotel-owner, there is an abatement of 60%—that means the service tax has to be paid on just 40% of the value of the transaction—but if it is a tour operator, as MakeMyTrip says it is, the abatement is a significantly higher 90%.
While the debate over who has to pay the tax remains to be settled, either by the government or by the courts, what is worrying about this case is that the arrest was made without even sending a show-cause notice to the company or its officials—the official was arrested on January 8 (a Friday), produced before a magistrate on the 9th and given bail on the 11th. When the judges asked the tax department’s lawyer why a show-cause notice had not been issued to the company—had this been done, it could have been challenged/discussed before a final order was given—the reply was that the investigation was still going on and that a show-cause notice would be issued after that. Since the judges were clearly not happy with the fact that the law allowed an arrest even before the case had been proved, they said “we are getting reduced to a police state, that is what is happening”. This case will be decided by the court— MakeMyTrip has filed a civil writ in the Delhi High Court so far and the judges have asked the tax department for all the records relating to the arrest—but the finance minister would do well to review the arrest powers given to officials. As an aside, just a week prior to appearing before the Delhi High Court in the arrest of a senior finance department official in his firm for alleged tax evasion, MakeMyTrip founder Deep Kalra was one of the stars of the prime minister’s Startup India function at Vigyan Bhawan—that’s a rude wake-up call for those promising ease of doing business in India.
Makemytrip chairman and group CEO Deep Kalra may have been a big star in Prime Minister Narendra Modi’s Start-up India show just a few days ago — in which the PM assured firms of an easier doing-business regime — but today he’s at the receiving end of a hostile service tax department which claims his firm owes them Rs 82 crore. A top official of his firm has been arrested for this — he is now out on bail — and the company is running between the Patiala House court and the Delhi High Court.
All of this, as the travel portal’s petition in the Delhi High Court points out, without even a show-cause notice, and without the due process of law being followed. “That manner in which power of arrest has been exercised by the Respondents against Mr MK Pallai is arbitrary, illegal and against mandate of Article 21 read with Article 14 of Constitution of India,” the travel portal’s petition reads.
It goes on to say that “as on date, no show-cause/demand notice has been issued by the Respondents under Section 73/ 73A of the Finance Act to the Petitioner, on this issue… That no formal charge has been framed against the Petitioner for the tax liability demanded (without issuance of show-cause/demand notice).”
The petition adds, “In any case, no basis for the figures, resulting into the imputed liability, determined by the Respondents have ever been given to the Petitioner.”
Not surprising, then, that when the case was being heard by the Delhi High Court and when the judges asked the tax department’s lawyer why a show-cause notice had not been given — the reply was that that it would be given once the investigation was over — an incensed justice S Murlidhar observed, “No show-cause notice, not even a scrap of paper to show that he owes 67 crores to you. This is a remarkable way of collecting taxes. Do you have any document to prove his liability? Now, even without a notice you have collected 40 crores. We are getting reduced to a police state, that is what is happening.”
The high court has asked the tax department to bring to it, on February 23, all the records relating to the arrest so it can ascertain how this was done without even a show-cause notice being issued. Had this been issued, the company could then have challenged it legally instead of, under threat of its official being arrested, being forced to deposit Rs 40 crore of tax.
While denying that it has evaded any tax, Makemytrip has argued that the arrest has taken place under Section 91 of the Finance Act — this in turn refers to Section 89(1) — but these sections cannot apply to an individual; it has relied upon the Sunil Mittal case versus the CBI to say that an individual cannot be seen as the alter ego of a company.
The case, which has larger ramifications for the entire e-commerce industry, revolves around the billing done by Makemytrip. The company argues that the billing done to customers is largely on account of services they avail from either hotels or airlines, so the service tax on this has to be paid by the hotels/airlines and not by it. As far as the money it makes in the transaction as a tour operator, Makemytrip says that it has paid all service taxes and there is no dispute over this.
Apart from the fact that a travel portal/tour operator cannot be asked to pay the tax on behalf of either hotels or airlines, there are different taxes applied to hotels and travel portals. If Makemytrip was indeed a hotel company and owned the hotels, it would be allowed an abatement of 60% — that is, taxes would be paid on 40% of the billing. As a tour operator, however, the abatement is a much higher 90%. So, even if it wanted, Makemytrip could not collect taxes on behalf of the hotels/airlines. Besides, the company argues, all clients don’t pay the full amount to it — some do so, while others choose to pay the portal its commission and pay the rest to the hotels/airlines.