Mumbai: The income-tax (I-T) department has sent show-cause notices to 45 companies, including retailers, hotels and online travel firms, for non-payment of tax deducted at source (TDS) on commissions charged by banks for facilitating credit card transactions, two senior I-T officials said. The I-T department is targeting Rs 500 crore in revenue collection through the exercise, said the officials, who spoke on condition of anonymity.
Companies to which the notices have been sent include retailers Pantaloon Retail India Ltd, Infiniti Retail Ltd and Titan Industries Ltd; online travel firms Cleartrip Travel Services Pvt. Ltd, MakeMyTrip Ltd and Yatra Online Pvt. Ltd; and luxury hotel operators Hotel Leelaventure Ltd and Indian Hotels Co. Ltd that runs the Taj hotel chain.
A show-cause notice is not an indictment. It’s a notice asking a company to explain its position on a specific issue, seeking a reply typically within a month.
When a credit card is swiped on a machine for payment, a bank (known as the acquiring bank) facilitates the payment to a merchant after deducting its commission. Typically, the bank charges a 2% commission for facilitating payments through credit cards. The I-T Act (under section 194H) requires an assessee to deduct 10% TDS on commissions or brokerage paid to any entity.
This commission, according to one of the I-T officials cited above, is liable to TDS as the firms have a principal-to-agent relationship with the banks. “We found that none of the firms were deducting TDS on commissions paid to acquiring banks for providing this facility,” said the I-T official.
The income-tax department has sent notices to companies for non-payment of tax deducted at source. But Mint’s PR Sanjai says that the companies say they are not liable, since the amount should be deducted directly by banks.
Modern or organized retail accounts for $35 billion ( Rs 1.84 trillion today), or 7-8% of the $470 billion retail market in India in 2011, according to consulting firm Boston Consulting Group. Close to 40% transactions in the organized retail sector are done through credit cards.
Back-of-the-envelope calculations indicate the I-T department is eyeing a revenue collection of Rs 147 crore from retailers by demanding payment of TDS.
The Indian online travel market is estimated at Rs 20,747 crore and is likely to grow at 22% to reach Rs 55,995 crore by 2015, as per a November 2011 report by Avendus Capital Pvt Ltd. MakeMyTrip is the market leader in this segment with a 48% market share, followed by Yatra Online and Cleartrip, the report said.
Most of the revenue of these online firms comes from card payments, currently under the I-T department’s radar, according to the two I-T officials cited above.
The companies sent notices are contesting the I-T claim.
“We are taking the matter up with the Retailers Association of India,” said a Future Group spokesperson. Future Group is the parent of Pantaloon Retail, India’s largest retail company by revenue, which runs the Big Bazaar and Food Bazaar chains.
Kumar Rajagopalan, chief executive officer of the Retailers Association, said the industry body is “taking up the matter with concerned authorities”.
Rajesh Magow, co-founder and chief financial officer at MakeMyTrip, said the I-T department had not issued any show-cause notice, but raised questions about the treatment of TDS as a part of tax assessment.
“In any case, we do not control the money. The payment gateway or bank collects the money when somebody swipes his or her credit or debit card and later returns the money to us,” Magow said. “So there is no question of us paying up the money. However, we are taking up the issue.”
Magow added that 85-90% of transactions done on his travel portal are through debit cards, credit cards and net banking. Cleartrip executives declined to comment.
According to the Reserve Bank of India’s April bulletin, 287.68 million transactions worth Rs 87,057 crore were made using credit cards between April 2011 and February 2012 in the retail sector. Debit cards were used to pay worth Rs 48,778 crore on 296.87 million transactions during the same period.
Dhruv Shringi, chief executive officer and co-founder ocf Yatra Online, said his firm hadn’t received any such show-cause notice from the I-T department. He added the firm is fully compliant with all TDS-related matters.
Hotel Leelaventure and Indian Hotels declined to comment. Text messages sent and phone calls made to Infiniti Retail, which runs the Croma store chain, and emails sent to the official communications agency of Titan Industries did not elicit any response.
A senior executive at Hotel Leelaventure, requesting anonymity, said his company hadn’t received any notice from I-T department, adding no case for deducting TDS as the money is controlled by banks.
“Prima facie, this (TDS on bank charges for credit card transactions) is not applicable to the retailers, as they have a principal-to-principal relationship. TDS is paid when there is an agent and principal relationship,” said a retail industry executive who did not want to be identified pending a decision on the course of action to be adopted on the show-cause notice.
According to the same executive, the notice has far-reaching implications and if acted upon, credit transactions in the entire retail industry would be covered by it. “This is a retrograde directive as it adds additional administrative financial burden to the retailers,” he said.
Another retail industry executive, who also spoke on condition of anonymity, said, “The question of deducting TDS does not arise at the retailers’ end as they don’t even see that money. This is a banking matter as the credit is provided by the bank that issued the credit card and the 2% is cut by the acquiring bank (which can be a different bank) on whose terminal the credit card is swiped.”