Conflicting signals

UPA's leadership says one thing, its tax office does another

Thanks to the fact that Infosys is listed in the United States as well as India, market participants now know that Indias income tax department has demanded Rs 577 crore from the second-largest information technology company in the country, even as the company also fights tax claims worth Rs 1,175 crore for four years in the 2000s. Infosys, fulfilling its obligations in the US, told that countrys market regulator, the Securities and Exchange Commission, that it has received the assessment order from the income tax authorities for the financial year 2009 on May 2, along with a demand order for an amount of $106 million. The company has stated that it is in the process of filing an appeal against this demand, for the year 2009, as it runs contrary to a clarification that the Central Board of Direct Taxes (CBDT) issued in January this year on the question of whether income from on-site software development was subject to various tax benefits. Indeed, the question remains as to whether the CBDTs recent clarifications on various points about transfer pricing and tax benefits in the IT sector, based on the recommendations of the Rangachary Committee, which was set up last year, have made the situation clearer or in fact more complex for taxpayers. In this case, the January clarification had said that software developed abroad, at a clients office, would qualify for certain export-related tax benefits. The tax demand on Infosys seems to run counter to that.

Even on occasions, therefore, when committees that are set up at the highest level  such as the Rangachary Committee  investigate problems in the implementation of the tax system and come out with reports, the tax authorities seem to find ways to undermine any progress. It has been a matter of concern for some years that the United Progressive Alliance, or UPA, has allowed the central tax authorities to slip off any kind of leash; the feeling in industry now is that they are running wild. Definitely, the values attached to some transfer-pricing assessments that have been made lately are genuinely puzzling. Instead of accepting that there have been some problems with the revenue officers valuations, the tax department a few weeks ago instead lowered the tolerance band for most intra-group transactions to one per cent  which means that the difference between the taxmans idea of arms-length value and the transfer price agreed by the group companies should be less than one  per cent, or they will be subject to investigation. This will vastly increase the number of audits and the degree of harassment  and decrease the ease of doing business, further hampering Indias economic recovery.

The situation gets more complicated when UPA ministers decide to initiate moves to resolve tax disputes, even in cases where such conciliation process can make sense only after getting the necessary legislative changes approved by Parliament. As in the Vodafone case, the government has now reportedly realised that it needs to amend the law first before any conciliation process can start to resolve the dispute with the telecom company. Indeed, the worrying thing for the UPA is that such developments are taking place at a time when the prime minister is insisting that conditions for doing business will get better, and the finance minister is wandering the capitals of the financial world trying to sell India as an investment destination. Who will believe Indias political leadership if the ministers announce moves that run contrary to the existing income tax laws or the tax administration goes its own merry way, one opposite to the path that the prime minister and the finance minister have outlined?