The government has begun random audits of IT companies across the country on possible violations of the Software Technology Parks of India (STPI) Act, even as it mulls extending the benefits of this legislation to 2015.
The principle suspicion is that several companies have claimed tax breaks on software exports without actual service delivery, prompting the Ministry of Corporate Affairs (MCA) under Salman Khurshid to take action to prevent Satyam-like frauds from recurring. On January 7 this year, Satyam's founder Ramalinga Raju confessed to long-term accounting fraud, one of the largest scandals in recent Indian corporate history.
A senior official of one of the top three Indian IT service providers confirmed, on condition of anonymity, that “the audits are being done randomly as the government suspects there could be discrepancies between revenue receipts and actual billing.” He added no such anomaly has been detected so far, but the government would be keen to plug loopholes that might allow for such transgressions.
The official added given that most IT companies today have multiple delivery centres, physically verifying documents is arduous and difficult to determine where the actual billing is done. "That is why the government is smelling a rat. But the focus is more on misuse among small- and mid-sized companies rather than the big ones which are more transparent in their dealings," the official said.
The STPI Act is essentially a government-run export-oriented scheme that integrates the concept of 100 per cent Export Oriented Units (EOUs), Export Processing Zones (EPZs) and science or technology parks. As on March 31, 2007, 7,543 units were operative out of which 6,321 units were actually exporting.
Misuse of the tax benefits under Sections 10 (A) and (B) of the Act, which were extended for one more year to 2010 in this year’s Budget, can occur in various ways. For one, since there is no physical transfer of goods, it is difficult to account for the business. “What’s the sanctity that genuine work has been done? Since the government is literally subsidising profits, the malpractice is tantamount to money laundering,” says an official requesting anonymity.
Som Mittal, president of software body Nasscom, added, “Till now, the government had ‘trust’ in IT companies. But Mr Khurshid is right in taking steps to prevent misuse, if any. The policy is now to ‘trust but verify’ which implies increased compliance.”
The government, he added, used to ask whether submissions were taking place on time. "Now, they are looking at the tonnes of data and going through the submissions which could throw up a lot of smoke," he said, adding that "these are directional approaches to corporate governance that go beyond regulation and include softer issues like employees' relations with the company, company’s relation with its customers and its own vendors.”
Mittal, however, qualified that the scrutiny is not restricted to IT companies. "I must say, though, that Indian IT companies, by and large, have been very honest.
The IT firms themselves have been making submissions on parameters like the amount of software exports and the number of deals done. The number of submissions made are amazing," said Mittal.
A task force led by Infosys chief mentor N R Narayana Murthy, he added, is drafting recommendations on corporate governance to help the government.