Around a week ago, the tax department signaled to the world—in the MakeMyTrip case—it continued to hold the view, even after the Delhi High Court admonishment, that it was perfectly all right to arrest an individual on charges of not having deposited taxes even without issuing a show-cause notice. While the service tax department and the travel portal differed on the amount of tax that had to be paid, what was worrying is that it had arrested the company’s vice-president (finance) for this without going through the process of law—that is, issuing a show-cause notice to the company and then arguing the matter out in a court of law. MakeMyTrip, for the record, had argued it had deposited service taxes on the commissions earned by it, but the tax on the room-nights would have to be deposited by the hotels to whom it transferred all receipts after deducting its commission. While challenging the High Court verdict last week, the taxman said if the interpretation given by the court was followed, “it will result in the powers of arrest granted to revenue authorities becoming completely redundant and non-exercisable”; it then justified the arrest by saying the purpose of the arrest “is to conduct a fair investigation which thereafter, results in the issuance of a Show Cause Notice and adjudication of the amount”.
And yet, last Friday, the service tax department issued a circular reiterating the conditions under which an arrest could be made for collecting service taxes but not depositing them with the government. It talked of ‘conditions precedent – legal’ which included clear and unambiguous file notings that established the crime but then said even if all these conditions were met, this did not mean an arrest was to be made. This could be made only if the alleged offender was likely to hamper the investigation if not in jail and tamper with the evidence or influence witnesses—none of this held true in the MakeMyTrip case. The circular added ‘arrest and prosecution should not be resorted to in cases of technical nature, i.e. where the additional demand of duty/tax is based totally on a difference of opinion regarding interpretation of law’. On the face of things, this applies to MakeMyTrip since there is a clear difference of opinion on the applicability of the law. But if the finance ministry is trying to reassure potential service taxpayers it will play fair, surely this runs contrary to what the appeal in the Supreme Court says? The ministry can’t have both—both the appeal and the circular can’t coexist.