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 Rs 75 crore of service tax. The case has larger ramification for the entire ecommerce 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 etailers, the argument they make is that VAT needs to be paid by the eventual sellers and not by them. Theoretically, there’s an easy solution in asking ecommerce 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 ecommerce. 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 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’s 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, 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.