The Hindu Business Line : Taxing problems

CORPORATE lawyers have made structuring into a fine art. In the typical network of companies, the meaning of words such as `related party' and `arm's length' transactions are fought over by legal brains. One such question — which corporate entity should legitimately charge advertising expenditure to its income — is almost metaphysical in its complexity.

Who the real marketer or manufacturer is and whether he is the person who should pay for the promotional efforts, is the point at issue. It is rather like asking whether Truth and Morality are independent of the notion of God or whether the latter gives sanctity to them. In all such debates, there will be strong adherents of totally opposing viewpoints, to whom their answer will seem self-evident.

However, policy-makers tend to err on the side of what rakes in the moolah. Expediency rather than a well-argued out rationale creates problems and delays due to endless litigation. We saw this in the case of determining the assessable value for excise duty, meant to be a tax on manufacture of goods, and, therefore, could not include the money spent on carrying, storing, selling or advertising them. ITC and Voltas are case law examples.

The recent issue of whether a company making the cola concentrate can bear all or a part of the advertising expense on the soft drink, is a similar instance. The notion that making, selling and distributing or promoting them is clearly definable and separate is a matter of pedagogic convenience used in management schools. In reality the edges are always blurred.

Technology and developments in interactive marketing have smudged even more the area between the maker and the consumer of products and services. Certainly, one can say that the purpose of making the cola concentrate, for example, is to sell it eventually in a drink; and so, to develop a custom for it is part of the design of the business. Nowhere does the law suggest that the company cannot divide up its operations as it pleases.

In these days of worldwide outsourcing, the terms inside and outside of a business are meaningless. It is no longer just the call centres and the repairs and services units that are run and owned by entities entirely different from the maker of the product. Even things such as advertising, recruitment and record maintenance, thought as being very much a part of the core business, are `outsourced'.

In some emerging categories such as music and entertainment the meaning of even robust notions such as copyright are being challenged. Some others speak of co-creation of the experience involving the consumer in the `production' process. This brings to mind the futility of such traditionally strong ideas as import duties, officially abolished on software only some years ago. After all when you can send information round the world at the click of a mouse where do you place the sentry and his toll-gate? Legislation and policy-making had better grow up. Governments all over the world must recognise realities (that company structures will keep growing complex, to beat tax laws) rather than wield the scythe of suspicion hoping to reap an additional harvest of taxes.

S. Ramachander

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