Mistaken notice

Giant tax demands should not be rushed

A “pre-show cause” notice issued to information-technology (IT) major Infosys by the tax authorities has caused ferment in the markets and beyond. The notice held the company liable for what it said was unpaid amounts of integrated goods and services tax (IGST) on transactions between its offices in India and abroad. The company views this as services delivered to itself. The tax office has chosen to argue that its overseas offices or subsidiaries are independent. The concern in the markets has been enhanced by widespread confusion regarding the exact status of the claim. To begin with, the state authority — Karnataka — that had also issued a notice has withdrawn it. Some of the back taxes that are being claimed may be time-barred or may soon be time-barred. The claim may or may not be superseded by a promise made in a circular issued in July. The claim may or may not be extended to all other IT companies with similar overseas subsidiaries — and they may or may not receive protection from the same circular. Such demands may or may not be extended also to airlines with overseas home or branch offices.

This level of confusion over tax claims is exactly what the government should strive to avoid. It is possible that this claim on Infosys — at Rs 32,400 crore, comparable in size to the company’s profits — has been rushed in to meet various deadlines enshrined in law. That is a violation of the spirit of the law, and in practice it demonstrates contempt for the taxpayer. Rather than taking the time to check that a demand is justified and to compare it with overall business practices, the demand has been rushed in to make sure that a deadline is not missed, under the assumption that proper checking can be done later and it can always be withdrawn. This is not an acceptable attitude, and there should be some accountability for those that act on such a misreading of the spirit of the law.

The spirit of the tax reforms of the past decade is or should be clear: Greater transparency and predictability. Such rushed notices, which create a tide of confusion and concern, clearly act in the opposite direction. If normal business practice, such as Infosys’, is brought within the tax net in a novel manner, then that should be signalled through open discussion and it should not be applied retrospectively. If a large company or an entire sector has spent a decade paying tax in a particular way and the tax department thinks — years late — that the assumptions underlying that action are inaccurate, then rushing in with a giant tax demand just before a window closes is not the way to express that view. The Union government has consistently claimed that tax terrorism is being ended. But, for investors on the ground, each such action by the tax authorities — even if taken back after an outcry — is merely an indication that policymakers have little or no control over how the tax bureaucracy operates. Unless GST is reformed and simplified, and the tax office held accountable, investors will continue to fear doing business in India.