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 and China. This shortsighted 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 bluechip 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 US political groups that it is not ‘body-shopping’, the Incometax Department has taken the reverse position that revenues from such activities do not constitute ‘service exports’ and that it really is ‘bodyshopping’.
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 focussing 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. 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 and successful world-class companies to flee India. He says that this flight of capital is making China and 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 and 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.
