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Dear Income-tax Department, ‘Thank You’ For Ruining Indian Economy

Shri. Jaitirth Rao

Dear Income-tax Department, ‘Thank You’ For Ruining Indian Economy

Shri. Jaithirth Rao, Entrepreneurial Whiz-Kid

Jaithirth Rao, renowned entrepreneur, expresses deep anguish at the arbitrary manner in which the income-tax department is harassing Global BPO companies and raising bogus tax demands, forcing them to relocate their operations to foreign countries like the Philippines & China. This short-sighted approach of the income-tax department will ruin the Indian economy, he warns

Jaithirth Rao, entrepreneurial whiz-kid, has launched a blazing attack on the income-tax department for its arbitrary policies which is forcing large blue-chip MNCs to shift their BPOs from India to more reasonable Countries.

In a thought-provoking article in the Indian Express, Jaithirth Rao spoofs a letter from the Finance Minister of Philippines to the Finance Minister of India “thanking” the latter for the “vicious harassment” that the income-tax department has heaped on the Indian IT and BPO industries which has caused a shift of BPO businesses from India to the Philippines.

the income-tax department is raising tax demands on captive units of global companies using their global profits as the basis and points out that this one decision alone would cause several of these companies not only to stop growing their Indian subsidiaries, but actually start winding them down

Jaithirth Rao points out that the income-tax department has launched a ‘concerted strategy‘ over the past several years by making frequent and arbitrary changes in rules and says that this has resulted in “vicious harassment” of Indian IT and BPO industries.

In sarcastic & death-gallows humour, Jaithirth Rao says that Philippines counts the Indian income-tax authorities amongst its “best friends” and requests that the names of the “worthy individuals” who are behind this “wonderful strategy of weakening this labour-intensive Indian industry” be given so that they can be awarded special “Magsaysay Awards” and be honoured as “Friends of the Philippines”.

On a serious note, Jaithirth Rao points out that the Indian income tax authorities are particularly targeting captive BPO companies, which were till recently being regarded as the “poster-boys of Indian I. T. Industry“, by asking them to re-compute their taxable profits based on arbitrary and changing transfer pricing guidelines without adequate safe harbour provisions, which are commonplace in most countries.

while in forums like the WTO, India has been vehemently arguing in favour of free movement of labour and opposing the stand of the US political groups that it is not “body-shopping”, the income tax department has taken the reverse position that revenues from such activities do not constitute “service exports” and that it really is “body-shopping”

He says that this “capricious behaviour” has resulted in many captive units stopping the growth of their Indian BPO outfits and accelerating the growth of their units in foreign countries.

He also laments that the income-tax department is raising tax demands on captive units of global companies using their global profits as the basis and points out that this one decision alone would cause several of these companies not only to stop growing their Indian subsidiaries, but actually start winding them down.

Jaithirth Rao says these “business-unfriendly” ideas of the income-tax department will shrink the Indian BPO industry and while these “rapacious tax demands” will in due course be struck down by the courts, in the meantime, the companies will have to pay up, be out of cash and will be spending their time and money on expensive tax lawyers instead of focusing on their operating businesses. In this unfortunate state of affairs, all BPOs close shop in India and move to the Philippines and China, he says.

Jaithirth Rao also points out that while in forums like the WTO, India has been vehemently arguing in favour of free movement of labour and opposing the stand of the US political groups that it is not “body-shopping”, the income tax department has taken the reverse position that revenues from such activities do not constitute “service exports” and that it really is “body-shopping“. He says that the income-tax department’s stand “fatally undermines” the sovereign position of the Government and strengthens the hand of the US political groups which wish to impose trade barriers on Indian firms.

The income-tax department is “determined to wreck one of the few industries where India has achieved world class and where Indian companies are considered formidable operators” and their action of reopening past assessments and raising huge untenable demands by terming “service export revenues” as “body shopping revenues” (despite earlier explicit and emphatic assurances that on-site project implementation revenues would be treated as export income) is forcing large & successful world class companies to flee India. He says that this flight of capital is making China & Philippines “salivate” at the prospect of global corporations setting up operations in those countries in preference to India.

As opposed to the unreasonable stand adopted by the income-tax department, the Revenue in Philippines & China have decided to do exactly the opposite and are reasonable in their tax demands, simple and transparent in their transfer pricing rules and generous in their tax holidays, he says.

24 comments on “Dear Income-tax Department, ‘Thank You’ For Ruining Indian Economy
  1. AKSHAY AGARWAL says:

    I am AKSHAY AGARWAL a student pursuing law, believes in the fact that some kind of motivational advertisements should be promoted in order to encourage the maximum number of participation in paying of tax,

    In my daily life routine i observe and come across many types of business groups and entrepreneurs who are in no way paying tax to the govt.

    1 In my opinion an advertisment should be promoted for all the consumers of a single product who buys it from different sellers which includes tax payers and non tax payers and sells that product at somewhat equal prices, it should be explained to a consumer that if he pays a little tax amount, that money is going to be refunded to him only in a manner of comfort for his daily living, for eg — metro, buses, highways etc.
    THE CONSUMER HAS TO BUY THAT PRODUCT , BUT IF HE IS MOTIVATED TO BUY IT FROM A TAX PAYING SELLER, THE TAX AUTHORITY WILL DEFINITELY OBSERVE A RISE IN NUMBER OF TAX PAYERS

    2 Also an advertisement should be promoted SHOWCASING that any person who is not paying a tax is an enemy of the welfare state , he is taking all pleasures of the government services which are being produced by the loyal and hardworking tax payers but is least bothered to do his duty., this will create a feeling of proudness in the tax payers and a feeling of shame in non tax payers,
    THIS WILL CREATE A FEELING OF SUPERIORITY IN THE PERSONS WHO REGULARLY PAYS TAX AND ARE WORKING TO WORDS THE DEVELOPMENT OF THE SOCIETY AS A WHOLE.

  2. VEERAMANI says:

    It is unfortunate that the author has taken the cue from Jaithirth Rao instead of expressing himself. In a free country like ours anyone can hold any opinion whether it is right or wrong, or whether it promotes national interest or not and there is a willing media to publish such opinions which are anti establishment. No business man does buisness with a motive of being charitable to the country, as a tree does not grow to give shelter. The shelter, fruits, flowers, leaves etc. are incidental and trimming the tree at times also becomes necessary at times. If the business has shifted operations from India to Philipines it is only with the object of improving its PAT and not because it would have incurred losses. The shifting of the business only betrays that the attitude of the persons shifting their business from India to Philipines – they do not bother where they do business so long as they reap high profits – they have no loyalties. Why should the government succumb to their blackmail?

  3. kirit sanghvi says:

    One cannot agree more with the article. It hits the point accurately. I had read somewhere that public can be immoral but the State cannot. Here, in our country, the State behaves like an individual; it suffers from prejudices and a sense of vengeance in defeat just the same way as we individuals do. The State forgets that real democracy lies in the rule of law, not in brutal force of the numbers of elected representatives. We have all kinds of legislation legitimized by a majority of votes in the Parliament, irrespective of the fact that some legislation may be unfair and against the principles of natural justice. Every time the State loses a case in Court, it is very sad that the State sees the victory of justice as its own defeat. The State should remember that it is in the victory of justice that everyone’s good lies, including the State’s.

  4. CA V.Mahaganapathi says:

    It is worth to take note of the speech by Shri. Pranab Mukarji which goes as this – “Change in law not to reopen old cases – He assured the the industries that the govt. will neither be vindictive nor behave like a policemen – I can assure the industry that there is no intention of opening plethora of the old cases on this plea or that plea because that is simply not permissible (under the laws) – This amendment has been made not with any vindictive or with asserting any particular point of view. this is absolute requirement of the law…. but at the same time i am not holding my money. i am custodian of money given by 120 crore people through taxation – on the vodaphone related amendment, he said while there was apprehension that all the cases could be opened from the date of enactment of the act, it would not be so as there are other provisions in the act and under no circumstances the cases could be opened beyond a period of six years “. Can any one understand the intention of law. What one should follow now?. The Act? The Court? Politician? Conference Meetings Discussion? Media Reports? Forum Peoples opinion?. India is fully corrupted not because of defects in law or insufficient laws – only because of its confusions. Everything adds fuel and it does solves nothing.

  5. ashok Shah says:

    This is obvious when CBDT chairman is saying that the promotion of the officers shall be based on their collecting higher and higher taxes. You can not expect better from Indian govt. when they have attemted to reverse the supreme court judgement. How can this be possible retrospective. On the bases of the prevailing law if some transaction is entered into , at later stage how can you change the law retrospective. This has put the Tax Advisors in a precarious condition. they can not advise on the basis of the law prevailing.

  6. gopal nathani says:

    vodafone case is one of most important rulings not only for the government but also for the assessee’s. The Apex Court has left many of the thought processes for the government as well for the assessees. it touches upon every cornerstone of modern day conduct of business and several complexities surrounding the business transactions. not to mention the government has been sluggish in making amendments that were required to be made as early as in 1990s when the country was opened up for foreign investments. BPO’S have enjoyed the exemptions u/s 10A/10B/80HHE but they did not raise any complaints. now that the exemptions have gone and TP regulations, look through provisions, GAAR, treaty parellel and constraints have taken over there is a pain and noise . why? these provisions are need of the hour as the SC also felt so. if the dealings are at arms length then there should be no worry. look at domestic transactions where the provisions are now being made for transfer pricing and interestingly the government has brought these regulations only because the Supreme Court has so felt the need by one of their rulings. But I do not see any noise as far as those provisions are concerned.

  7. Butchaiah says:

    With more than 4500 amendments to a 50 year old enactment (IT Act 1961) ie., approximately an amendment every 4 days can any one expect sanity in the Indian Income tax Act. Also with the recent plethora of retrospective amendments as a conseqence of defeat in Vodafone case will the Government show any semblence of common sense. If the Courts find fault –amend the law. Who legislates? Well, well-known. If corporates suffer so they be. Are not all of us suffering from perhaps every Law as law abiding citizens. Perhaps that is the reason why so many are getting elected (more than 33%) who care less for the law the legislate and indulge in making money at every opportunity. Dozens of Anna(s) may not be capable of bringing out a change.

  8. CA V.Ganapathy Subramanian says:

    The demand in certain cases is unreasonable. many of the orders issued especially in TP assesements are CtrlC+Ctrl V. without getting in to basic idea of how each business works, orders were passed by simply copying from previous orders or orders issued on other companies. some time the adjustments made by department , makes the client to think why to do such business in india. i have an example, where a client haveing Rs 200 lakhs turnover shows margin of 12.5%, whereas the departement comes with comparable of 40%. the litigation is at second level. already client spend 25 % tax demanded+ deposited the tax disputed.- 2 years goneby now. who is the winner here? it is a time that Fin Min to take call to fix some industry average % and it become the duty of assessee to substantiate the lower margin.

  9. CA MANOJ GUPTA says:

    I am in total agreement with CA Gopal Nathani. I do not understand why these entrepreneurs does not want to pay tax. On vodafone why we are crying foul. I think if one go by substance over form rule then Hutch was liable to pay tax on cap gain earned from sale of assets.

  10. suresh kalmadi says:

    The income tax department is taking every possible step to harrass tax payers. Assessing officers upload fictitious tax demands ( i.e demand which is rectified and deleted on account of appeal effect, recitification of mistakes credit for taxes not given and several other frivolous mistakes)as per their registers to CPC Bangalore. CPC Bangalore issues a fatwa. Pay the demand or get it cancelled by AO or risk getting demand adjusted against future refunds. AO says we have not been given the tools for getting the demand cancelled at the end of CPC Bangalore so we cannot do anything . CPC Bangalore adjusts refunds against bogus demands. Says ask AO for rectification and refund.AO refuses to do anything citing lack of instructions. What is this if not harrassment. This is an all India phenomena. Nothing short of terrorism. Board chairman says collect taxes by any means fair or foul and get plum postings. An ecouragement to the assessing officers to make any kind of assessment, raise any kind of demand, no accountability. Reminds one of what visitors to the Banana republics say. Keep your houses locked . If not the police will loot you and if they do not do so the gangs will. In India the Government servants are rewarded for such acts of harrasment but there is no reward for good administrative work or for attending to tax payers grievances

  11. Atahar Chowdhury says:

    Death-gallows humours cannot save the Indian Nation. Hard decisions are necessarily to be taken so that defrauding devices are exposed and brought to justice. Be honest to the core while doing businesses in India before the Government or the Taxman is to blame. Put forth constructive suggestions rather than spewing venoms against the government and its functionary. If there is something amiss, proper remedy is always available. Have respect for rule of law. Exercise restraint to not paint all with the same brush.

  12. Anilsukhdev Agrawal says:

    Are you an ardent Indian not to believe what Churchill said:
    Power will go to the hands of rascals, rogues and freebooters. All
    Indian leaders will be of low caliber and men of straw. They will have
    sweet tongues and silly hearts. They will fight among themselves for
    power and India will be lost in political squabbles.

  13. CA Deepak Nayak says:

    In my opinion, even if retrospective amendments are made for Vodaphone case, Supreme Court will struck down applicability of the retrospective amendment to the Vodaphone matter. This is especially when Vodaphone purchased the shares from Hutchinson, the then applicable law did not require the TDS deduction. Now when act of purchasing is over and after 5 years if any law is amended with retrospective effect, how can one hold Vodaphone defaulter in deduction of tax. This is against the Natural Justice and making retrospective amendment to override the Apex Court’s judgement is in my view contempt of the Court. We all professionals should raise our voice to protest and stop such unlawful amendments in the Act.

  14. ram babu b.com says:

    A Govt. which gives importance to the ‘Cinema-people'(compromise with every social value to give a message to the society- for the sake of money) can’t be expected to re-act on the problems like this. They hardly understand cumulative effect of this kind of actions.

    Few days back when supreme court made some comments for maintaining so mcuh stocks of rice without any protection , Our great former RBI Governor, Former Finance Minister, present Prime Minister with so many appreciations by the world known universities said that the courts are interfering too much.
    Now the Govt. of A.P. is offering rice for rs.1/- kg scheme. (you can guess which party would benefit) He encouraged it.
    these kind of Selfless stalwarts can’t be expected to take note of the situation.

    Mhatma Gandhi is an ideal person to these people as they can efficiently and legally test the patience of the people. If they can’t wait – they have to pay price.
    (LIKE THOSE WHO WANT REFUND ORDER EARLY) IF you point out anything they simply say that we have gone to their office to ‘argue’.
    The people who never realise how much money they are enjoying demand from the tax payers as if it is due for the past few generations.

  15. Sunil Ingale says:

    The Babus wii be babus. They never decide a case on merit. Instead they are always afraid of their accountability. More than 70% cases are decided against the Department. The CIT (Appeal) reports to CCIT, who has revenue collection target. How can CIT(Appeal) be fair in his approach?

  16. gopal nathani says:

    there are remedies available against every action of the department. it is not appropriate to make negative publicity of this kind and it is to some extent defamatory and not in national interest. an ITO is a government officer who would apply the Act provisions and nothing outside it. and there are built in provisions , treaties, board circulars, instructions etc. to regulate the law. and and excesses can be dealt with appropriately. until such time the vodafone ruling had come no one said anything like this about the department. it is not as if the hardships are faced by only BPO’S even domestic companies have to fight their case. lets take the case of units set up in Himachal Pradesh of which some are found to be bogus being set up for taking tax shelters. I know of genuine units having to estalish their manufacturing by fighting their case all through till ITAT and beyond. does that mean the department is ruining any image of the country. not at all. many a times and almost in most cases the ITOs do harass but I wonder whether such things do not happen anywhere in the world. on the retrospective anmendments let the Courts deal with it as and when they form into a legislation if challenged.

  17. P. PRASAD says:

    The present Indian Income-Tax Law scenario is that, you endeavor in winning the Income-Tax matters in Appeal before the CIT[A] and the Department makes a frivolous appeal before ITAT and you endeavor and manage to get the orders in your favor and no sooner you win the matter, your happiness and efforts are short-liven as the Department makes an amendment and that too retrospective and retroactive. which is highly ambiguous and you land up again in payment of the huge demands raised along with penal interests which are very seldom waived, for which there is a very short limb to waive, which often is not used in favor of the assesses. This is the scenario of Indian Income-Tax Act.

  18. Anil Agrawal says:

    If the retrospective legislation is overturned by Supreme Court, will Manmohan Singh and Pranab Mukherjee resign?

  19. Anil Agrawal says:

    Rerospective legislation to nail vodafone and come round the Supreme Court Judgement.
    I have a suggestion.
    Why not have retrospective legislation that there was no 26/11 attack on Bombay and Kasab is an Indian.

  20. Vikram Aggarwal says:

    Having regard to the size and population of our country, the current litigation system and judicial system is in a very bad state. It is urgently needed to set up National Tax Tribunals. Cases pertaining to 1980s get decided in 2012. Tax uncertainty continues to prevail. Different High Courts continue to give varied decisions on same issues.

  21. RAJIV SAHNI says:

    This is only a tip of an iceberg. All Returns being processed by the CPC-ITD at Bangalore of business income in the recent past have a common ITR Processing error. They have not allowed depreciation claim of the businesses resulting in enhanced income being assessed and tax demands being raised, which are not existent. Reason-to show that direct tax collections for the FY 2011-12 nearly match the budget estimates of the FY 2011-12. This is one of the manner in which the data is fudged in preparation of Government Budget.

  22. Sanjiv Kumar says:

    Absolutely true! Shortsightedness of Tax Department and Govt. policies are going to be fatal for the growth of Indian economy and responsible for flight of job opportunities especially in the current scenario where the cost arbitrage for outsourcing works to India is not so attractive and we are trying to sell high end jobs at substantially higher cost.
    Unnecessary harassment by tax department especially in case of transfer pricing issues and retroactive changes in Tax laws etc. creates lot of confusion in the mind of investors as all the tax planning done by investors based on current legal provision at the time of investment in Indian economy goes for toss when the changes is made on retroactive basis. In recent past- two major changes has really made a significant impact on the minds of foreign investors viz. taking away of the tax benefits from SEZ unit by imposing MAT and change in capital gain tax regulation applicable to cases like Vodafone.

  23. K.VASANTKUMAR, ADVOCATE says:

    If people think that Income-tax department is targetting only BPOs and IT Sector they are mistaken. Now it is fancy for the officials of the Income-tax to determine huge incomes and raise huge demands to boast in their friends circle. They resort even to contempt of Supreme Court and violate constitutional provisions and Income-tax provisions. They do not spare even State organisations. There is no accountability. Even the CBDT is a mute spectator and when approached directs the tax payer to go to Commissioner in spite of the fact that such a petition is filed stating that the Commissioner himself is behind raising such demand. It is high time the Ministry does something to help the taxpayers and have a look at high demand cases.

  24. CA V.Mahaganapathi says:

    This article does not require any comment since it is very sharp, clear and to the right direction. It is a alarm cry by those who really love the country. If any official is concerned about the future of India will certainly work towards it. Else we will once again retain the so called name – India A Poor Country – Not in wealth but in wise.

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