CHIDAMBARAM STRIKES

The Central Board of Direct Taxes had issued a circular to the effect. The industry was disinclined to take it as true. Just about a fortnight before the Lok Sabha (the lower house of parliament) passed and voted on the Union budget on August 26, the finance ministry put its seal of approval on that circular. With that, it was made true and official. Thus struck Mr. P. Chidambaram at India’s IT industry, still nascent yet fast growing and attracting the whole wide world towards it like no industry worldwide so far did before.

Mr. Chidamabaram’s striking at it may seem axiomatic. Why not makes a growing industry pay the exchequer? And why not when all in the world are benefiting by it? And yet why not when the industry is making a whirlwind by becoming a world phenomenon?

Sounds logical. But look at the reality. The logic then would look the other way round. Which is to let the industry thrive, to let it employ more and also spread employment far and wide, to let it create new resources in work and workmanship, and to let it add to gross domestic product as well as the country’s foreign exchange kitty.

Particularly since the industry has sprung up from nowhere, found its roots by itself, added to its achievements year after year, and now become an apple of all eyes in the world, while in a spirit of globalisation enveloping the planet it has put the country on the world map like no industry did before.

Why must such an industry be put on a par with other industries in tax laws is a question Mr. Chidambaram needs to ponder.

For this is what Mr. Chidambaram has done in putting approval to the CBDT’s circular on IT industry in regard to its now rapidly increasing Business Process Offshore (BPO) activity as follows.

“If there is no business connection (between the outside business and the locally established unit),” so says the circular, “the resident entity will not be a Permanent Establishment of the non-resident entity.” In such cases, explains the circular, the Indian BPO unit will be assessed to Income Tax as a “separate entity”.

If, however, the non-resident firm does have a “business connection” with the resident Indian Company, it will be treated as a PE of the non-resident entity. Once a unit is established as a PE, says the circular, “the non-resident entity or the foreign company will be liable to tax in India”.

Pay taxes in India on business you do in India is the rationale of the CBDT’s circular on which as finance minister Mr. Chidambaram has signed his approval.

There appears nothing wrong on face of it. But not when, apart from the things said above about the industry, one considers that the enterprise is so closely tied in the world, continuously copes with changes occurring rapidly, and is constantly challenged by increasing competition from other countries.

Let it build upon its success can be one attitude of the powers-that-be. Make it pay while
it shines can be another attitude of those in authority.

A typical finance minister, Mr. Chidambaram has followed attitude two.