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The largest ever indirect tax demand - of Rs 2,000 crore - made on a south India-based lottery company has caused ripples in the industry across the country. The central tax administrators say companies which run lottery on behalf of state governments will be liable to pay a tax for the service they render to the state governments. Service tax at the rate of 12% will be levied on the commission they receive from the state government against the business auxilliary service they provide including selling, marketing, promotion etc.

The service tax department has decided to file a special leave petition in the Supreme Court against the stay granted in the case of Coimbatore-based Martin Lottery Agencies (MLA), which was issued a show-cause notice claiming Rs 2,112 crore in taxes. The case, which was tracked by the Directorate General of Central Excise Intelligence (DGCEI), will serve as a model for the service tax department countrywide. The excise intelligence wing's notice on September 19 to the company, for the period July 2003 and December 2006, eclipses the Rs 803 crore excise duty demand against ITC.

Lottery is a state subject. However, internationally, it is recognised as a service. Although the service tax department is not imposing tax on lottery in this case, tax is being imposed on services provided by an outside agency to the state government, classified as business auxilliary service.

MLA is the sole distributor of lotteries for the governments of Maharashtra, Sikkim, Nagaland and Punjab The company recently won a bid and was named the marketing agent for Bhutan's paper lotteries for five years from January 1.

The DGCEI in Bangalore, which investigated the case, is also seeking payment of penalty, alleging that the lottery company deliberately attempted to evade paying tax.

MLA got itself registered for service tax as a provider of business auxiliary services after its offices were searched by DGCEI sleuths and the non-payment of the tax was brought to the notice of the company, the notice says. It has deposited about Rs 57 lakh as token payment.

The pitch for the tax authorities has been queered by an order of the Sikkim High Court, which has quashed a letter by its office in Gangtok directing MLA to get itself registered for service tax. The court also observed that the activities of the company cannot be classified as a business auxiliary service, the category under which the authorities are seeking to impose the levy.

Tax officials, however, insist that MLA provides business auxiliary services because it promotes and markets lotteries.The high court had overlooked some facts and the authorities were confident that they had a good case. The lottery company is also under pressure from the police in Tamil Nadu, with MLA MD Santiago Martin securing anticipatory bail from the Madras High Court after raids of his offices. The police FIR claims that agents were caught illegally selling lottery tickets and that they had sourced them from MLA. Lotteries are banned in Tamil Nadu.

A Tamil Nadu police officer, who did not wish to be named, said he expected the probe to be completed in a month or two.

Mr. Martin, however, says he is innocent. Asked why MLA had registered for service tax even though it claimed it was not liable for the levy, Mr Martin said he had taken the decision after being pestered by tax officials. 

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