Can MakeMyTrip shut down after arrest for failing to pay service tax?
That taxation of technology-based businesses has emerged as a significant challenge for policymakers became clear when early this year MakeMyTrip came under the scanner of the Income Tax department.
The Service Tax Department arrested MakeMyTrip vice president (finance) M.K. Pillai on January 8 for alleged service tax evasion to the tune of Rs 67.44 crore.
He was granted bail on January 11. The travel portal argued that it is a booking agent and not liable to pay service tax on services that customers got from hotels and flights. The arrest was termed illegal by the Delhi High Court.
The court directed the Directorate General of Central Excise Intelligence (DGCEI) to refund the money it had collected from the travel portal.
The court had gone ahead and imposed a fine of Rs 1 lakh on the Excise Department to be given to each of the three companies – MakeMyTrip, Ibibo, and eBiz.com – for not following the procedure under law for determining action against the companies.
The Supreme Court has now stayed the Delhi High Court order that reproached the Finance Ministry for arresting the senior executive of online travel firm MakeMyTrip. Sources close to the development revealed MakeMyTrip was accused of cooking accounts and the Income Tax department got a whiff of things when the hotels filed returns.
The order by the court also effectively stayed prosecution of Tax Department officials for arresting the executive and issued notices. Moreover, the court added that no coercive action should be taken against officials of the three travel firms till the next date of hearing, which is November 9. While the government claimed that the company failed to deposit service tax after allegedly collecting it from those buying hotel room nights from it, MakeMyTrip states in its defense it had, in fact, deposited service tax on its commissions earned. The company claimed it should not be made to pay tax on the amount paid to the hotel as room rent.
It’s clear that the government wants to set an example and give a clear message to other online portals also to fall in line and warn them against attempts made to evade paying taxes. Would India’s biggest online travel agency be made the scapegoat in this process? It has been witnessed in the past how when the government fails to find its way around a problem, it resorts to banning the service like in the case of Uber. Will online portals like MakeMyTrip also be banned as a result of lack of a policy to tax technology-based companies?
This could be the reason why although India is now emerging as the software hub and a prominent service provider to the world, it fails to create an environment for technology companies to reach its full potential and become world beaters.
Founded by Deep Kalra in 2000 in the US and then extended in India in 2005, MakeMyTrip is the largest online travel company in India and is second largest most visited travel website after IRCTC.