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Taxman at the Door

An ignorant yet aggressive tax system has e-commerce companies looking for succour.
by Goutam Das | Print Edition: February 28, 2016
(Photo: Raj Verma)

It couldn't have been a trip M.K. Pallai would compare and book. His nightmare began on the night of January 8, a Friday. He was served a two-page arrest warrant at 10 PM, taken to a police station and locked up. By the time he was released on bail, Pallai, the Vice President of Finance at MakeMyTrip.com, had spent three nights in Delhi's Tihar Jail.

The issue was a service tax evasion investigation Pallai's employer was facing. The Director General, Central Excise Intelligence (DGCEI) alleged that MakeMyTrip, an online travel company founded in 2000 by Deep Kalra, had not paid service tax dues, amounting to Rs 67.44 crore, that it had collected from its customers. The investigation is still a work in progress, but, according to the Delhi High Court papers, where a civil writ petition was filed by the company, the DGCEI made the arrest even without issuing any show-cause notice. If service tax collected exceeds Rs 50 lakh and is not paid to the exchequer for more than six months, it is an offence and can attract imprisonment under Section 89(1)(d) of the Finance Act, 1994.

The developments, nevertheless, have raised the ugly spectre of "tax terrorism" yet again - something the BJP government promised to end. Pallai's arrest has forced the company to cough up Rs 40 crore to the government's tax kitty, even as the investigation continues. The Financial Express quoted Justice S. Murlidhar - who was hearing the writ petition - as saying: "No show-cause notice, not even a scrap of paper to show that he (the company) owes Rs 67 crore to you (the government). 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 Rs 40 crore. We are getting reduced to a police state, that is what is happening."

The country's mushrooming e-commerce sector - a $17-billion industry that is expected to be $100 billion in five years - appears terrified at this act. The incident has left many pondering: does the government, particularly the bureaucrat, really understand new business models? Anita Rastogi, Partner of Indirect Tax at consulting firm PwC, says there are many reasons for such incidents. "It could be the lack of understanding of the business model, as such transactions are new in India. Two, the indirect tax laws are old and were drafted largely when brick-and-mortar business was the norm. Third, revenue authorities are under tremendous pressure to garner revenue; so, in areas where there could be interpretational issues, tax demands are raised by them to be finally decided by the appellate forum," she says.

An e-commerce marketplace is a platform that connects vendors with buyers; the companies don't own the products. They pay a service tax on the commission they make to the Central government, while the vendor selling the goods pays a VAT to the state government. However, in 2014, the Karnataka government asked Amazon India to pay VAT

MakeMyTrip is a travel portal, an online tour operator. It does not own hotels or run an airline company. But, according to an executive close to the development, the service tax authorities "took up an extremely bizarre argument". "MakeMyTrip is being considered as an airline company. Under the service tax law, a tour operator is one classification and an airline or a hotel company is another. A hotel company is liable to pay service tax on 40 per cent of the value, whereas a tour operator is liable to pay service tax on 10 per cent of the value," the executive says.

So, if you want to go on a three-day weekend trip to Goa with family, MakeMyTrip can sell you a travel and hotel package for Rs 1 lakh, for instance. Rs 60,000 may go to the hotel and Rs 30,000 to the airline. "If Rs 10,000 is the commission, MakeMyTrip's service to the customer is to that extent. But the government officials said you collected Rs 1 lakh - so you are providing hotel and airline services," he adds.

A similar lack of understanding of new business models has afflicted the marketplace players - such as Amazon and Snapdeal - in a few states. An e-commerce marketplace is a platform that connects vendors with buyers. Marketplace companies don't own the products. They pay a service tax of 14.5 per cent on the commission they make to the Central government, while the vendor selling the goods pays a VAT to the state government. However, in 2014, the Karnataka government asked Amazon India to pay VAT. "In VAT, there is a concept of Consignment Agent. The Consignment Agent of the dealer can sell the product on his behalf. VAT authorities were of the view that e-commerce companies who provide market place could be considered as a Consignment Agent since they have a warehouse to store goods on the sellers' behalf," says Rastogi of PwC.

Different states have begun taxing e-commerce transactions in their own ways, which, in the long run, can be detrimental to the sector. The Uttarakhand Government, for instance, has imposed a 10 per cent 'purchase tax' on e-commerce sales - courier companies have to collect the tax from buyers. It is not clear what the Centre can do in some of these state issues, but e-commerce companies, especially start-ups, want standardisation. "For e-commerce start-ups, taxation needs to be re-calibrated in terms of tax having uniformity across separate regions which might not all come in the fold of GST," says Yosha Gupta, Founder of LafaLafa.com, an affiliate marketing company. The current complex indirect taxation structures not only create a huge burden for start-ups from an accounting and compliance perspective, but also create inefficiencies in the entire ecosystem by creating multiple checkpoints between state movement of products, according to her. "This causes delivery delays and prevents e-commerce start-ups from making their deliveries and processes more efficient," Gupta adds.

E-commerce companies assert that some of the "draconian provisions" in tax laws should go. "Section 89(1)(d) of the Finance Act, 1994, which doesn't provide any safeguards, should be illegal. We have told the government that you either need to drop this penalty provision or provide safeguards in the law. Otherwise, this is not even an Inspector Raj. This is Police Raj," says a consultant close to MakeMyTrip's developments.

He, along with everyone in the sector, would be monitoring every bit of the 2016 Budget keenly.


 

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