The Hindu Business Line : I-T versus IT

According to reports, the tax demand was for fiscal 2000-01, or the assessment year 2001-02, as put in tax lingo. So, we are going four years backwards, but compulsions of finishing pending assessments must have weighed upon the Department to fire off the letter in a hurry not only to Wipro but many other companies in the software sector.

A key provision that was cited in the missives is said to be Sec 10A of the Income Tax Act. If you were to download it from the official site of the Department and do a simple word count, it would show 2,282. That is because the section titled, "Special provision in respect of newly established undertakings in free trade zone, etc." is an essay in itself, and has been tinkered with regularly, leading in the process to much confusion as evident in the current tussle.

Among the conditions laid down by Sec 10A for the grant of ten-year `tax holiday' for profits and gains derived by an undertaking from computer software are: That it began to manufacture computer software on or after a specified date in any software technology park; that it is not formed by the splitting up, or the reconstruction, of a business already in existence; and that it is not formed by the transfer to a new business of machinery or plant previously used for any purpose. Also, sub-section 9 denied exemption in cases where the ownership or the beneficial interest in the undertaking is transferred by any means; however, this was softened by sub-section 9A that was brought in by Finance Act 2002.

The focus of the recent tax demand was profit earned by Wipro out of units located in a software technology park (STP) in Bangalore. Thus, one of the advantages that Wipro and many other such companies enjoy, is that a significant portion of their income from domestic investments is realised in a tax-free manner, using the STP route. Expansion of the units was not a taboo in Sec 10A, and was resorted to by Wipro, but here is where the problem came in the tax demand. The Assessment Officer was of the view that the expanded units were fresh entities, and they needed new licences from the STP authority.

When the news of the big parking ticket that the taxman stuck on Wipro's windshield hit the press, there was the sudden uncertainty about the direction our IT industry would now take, as also whether what we now have on hands is the clash of the titans, I-T versus IT. There were also those laid back analysts who advised the worried companies that nothing moves fast in tax appeals and so three years would be the minimum for some decision to emerge. Wipro, in the meanwhile, maintained that it had not taken any unfair advantage of the tax provisions, nor flouted any of the conditionalities laid down in the section. Thus, the company, as any big corporate player, was prepared for an appeal to the Commissioner, the forum that is provided by the tax regime as the first level of remedy.

If you were in the US, lobbying against outsourcing to India, the sudden developments at the beginning of April should have sounded great, applying brakes as it were to a juggernaut.

But the Ministry of Finance acted faster than people got the scent of the tax misadventure. Reports speak of a confidential letter, issued on Friday to all chief commissioners of income-tax (CCIT) to put a full stop to the stalking of IT companies by the taxman.

While the administrative diktat would be quite cheering for IT companies because they would not be required to cough up the tall demands, a useful lesson to draw from the entire episode would be that policies can be hijacked by myopic bureaucracy, if one were not vigilant. Full marks need to be given to the babus in the North Block who pushed their pens faster to achieve what could go down in tax history as one of the swiftest resolutions of a tax wrangle.