The Hindu Business Line : Budget: On the soft trial

The Finance Minister seems to have decided, at least for now, to allow "software export" firms to stay in the business of money laundering by leaving them alone, presumably because he isaware thatsoftware by naturedoes not necessarily leave trailsfor tax collectors.

THE Finance Minister, Mr P. Chidambaram, has formally recognised that the banking system is a conduit for a significant portion of black-money transactions by proposing the bizarre Banking Cash Transaction (BCCT) Act, which imposes a 0.1 per cent tax on cash withdrawals exceeding Rs 10,000 on a single day.

The proposal has been derided by the public, the Opposition, and even members of the United Progressive Alliance. Mr Chidamabaram, while agreeing to review the proposal, has remained adamant about incorporating measures that will leave trails of banking transactions for tax authorities to follow.

Speaking of trails, he seems to have decided, at least for the present, to allowe "software export" firms to stay in the business of money laundering by leaving them alone, presumably because he is aware that software by nature does not necessarily leave trails for tax collectors.

However, it is puzzling why he has not introduced a system to check `software' companies that exploit the privileged tax status of the software sector to launder money, an issue highlighted in Mr Charles Assisi's editorial in the January issue of the Chip.

Mr Assisi, the editor, quoted a study by the US Department of Commerce that stated that the US had imported software worth $1.6 billion in 2002-03 from India.

He went on to quote a spokesperson of the Confederation of Indian Industry (CII) who debunked the study insisting that the Americans had got it wrong and that India had actually exported $6.3 billion worth of software to the US in the same period.

Mr Assisi in his editorial mused, "A discrepancy of $ 4.7 billion? That's Rs 22,000 crore. I find it intriguing. Is something the matter here? For a moment, let's give the Indian software industry the benefit of doubt and assume the Americans got it all wrong, and that India actually exported software to the US worth $6.3 billion during the period."

He went on to point out that such an assumption raised a bunch of questions. "During the period under scrutiny, NASSCOM figures indicated total software exports from India to the order of $ 9.5 billion. Of this, the top 20 Indian IT companies accounted for $ 4.5 billion. What it means is simply this, that the top 20 Indian software companies exported less than half of what the industry as a whole exported. I find this strange because I can't think of any other industry where the top 20 contribute so little. Is the structure of our industry an aberration?

"Second, for the sake of argument, let me assume that the IT industry is indeed an exception. That means, the top 20 apart, there are software companies which collectively generate $5.1 billion (Rs 24,000 crore). For the period in question, I reckon there were close to 800 software companies. To create this kind of money, wouldn't each of these software companies have generated on average Rs 30 crore?"

Mr Assisi concluded with references to laundering of huge sums of money through the claimed export of software, stating the findings of numerous studies which have dealt extensively with "software exporters", and India's contribution of the term hawala to the business lexicon.

Internationally, nobody has paid much attention to this racket because exports from India are a measly 0.5 per cent of global total. But this is one subject that Mr Chidambaram, or any other finance minister, should not ignore.

If he is intent on taxing— and then keeping tabs on — ordinary people who want to withdraw their savings from the bank merely because the government can't keep the banking sector clean, then, in all fairness, he must also insist on creation of handy audit trails for the software sector.

Can he do it? He can and he can't.

What the Finance Minister can do is study the data on balance of payments compiled by the Reserve Bank of India. Software is definitely a component of India's service exports, but there are other services too which have been categorised under "miscellaneous".

What are these "miscellaneous" services, the export of which is as big as, if not bigger, than software? Here then is an audit trail readily accessible and waiting to be explored.

As for "software" exports, the trail is harder to come by since the code is intangible. A few lines of code may be worth nothing, or everything, depending on one's point of view. It's quite tricky to track code. These, of course, are the very reasons why the "export of software" is the hawala machine of choice.

Consider Mr X who has money stacked away in an obscure bank in the Cayman Islands. All that money is not doing him any good because it is not accounted for. So he sets up two companies, one in India (EOU, SEZ, STP or EHTP to avail complete tax exemption) and the other in the US.

Banks, from which you and I cannot withdraw money without being taxed, tagged and what have you, will vie with each other to give the deposited money to the Indian company at concessional rates of interest.

Mr X then uses this money to pay himself a hefty salary, buy a Beamer and generally have a good time. He will not have the slightest aversion to paying the fringe benefit taxes that Mr Chidambaram is so sold on. Why should he be?

Mr X then gets his US company to place an order for software services with his Indian company. The US company pays for the service, which may be so silly that it can be done by e-mail, but who is to determine its real value? With time, the relationship between the two companies grows. Orders get bigger.

The Indian company gets a prestigious award for its export performance. It declares handsome dividends — which are tax-freein the hands of the investors.

The investors are, of course, Mr X, his shell companies, his family members andbenami friends and associates. He laughs all the way to the bank where he now keeps what was once black money, now laundered in pristine white!

As for you and me, it is extremely unlikely that we will bump into Mr X while standing in a long queue, waiting to draw cash to buy stamp paper — for which the government does not accept cheques.

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