Saturday, 7 November 2009

The taxman and Windows 7

If you are in India and wanted to buy a Windows 7 box, you could not do it legally. Never mind that Windows 7 was released globally about 2 weeks ago. Never mind that much of Windows 7 development happened in India. Why ? Because the babus (pedantic officer) at Customs wanted to tax the stuff twice !!

This is an example of the nonsensical complexity that abounds in India’s taxation law and the missionary zeal with which the babu wants to implement them – methinks the ultimate frustrated guy is the Indian babu and his only source of pleasure in life is from creating and implementing mind boggling complexity.

Take the Windows 7 situation. The product is the standard software box with a CD and a manual in it. Because it’s a box, it’s a physical product. Therefore customs duty on the “product” is to be levied. Then the box contains a CD which gives you a license to use the software. Giving the license to use is a “service”. So they want to again charge service tax on the same box. Tax the same stuff twice - once as a product and once as a servie. Only the warped mind of an Indian babu can come up with such logic. Boxed software sales in India have fallen by 40% as the boxes gather dust in the customs warehouse. Furious lobbying, intricate clarifications from the mandarins in Delhi, millions of manhours of intense activity and the boxes seem to be ready to leave the shipyard now.

Examples abound of such inanity. Many years ago, I knew of a case of a producer of jams. In one budget, the government decided that jams should be exempt from excise duty as an incentive to fruit farmers. The producer of jams heaved a sigh of relief. But the next day, the babus descended on the poor guy. They said that while manufacturing jam, he starts by dissolving sugar in water , the act of which was the “production” of sugar syrup. He doesn’t have to pay excise duty on jams, but would he please pay excise duty on sugar syrup. The producer protested that he wasn’t producing sugar syrup – he was just executing a step in the manufacture of jams. NO. The babus , with great glee, were “enforcing the law”. The producer asked that instead of dissolving sugar in water, if he first mixed the fruit pulp and then added sugar in the mix, would that be OK? Yes; that was absolutely fine to the babu. No “sugar syrup” was being “manufactured” and that was fine !!!

Needless complexity and zealotry in arcane interpretations bedevil our taxation system. One one hand it leads to misery for a guy who wants to follow the law. On the other hand, it provides myriad opportunities for corruption. We should simply exterminate the tax babu. Bring a common rate of taxation on everything. Make the damn thing simple . And then enforce it ruthlessly. If the system was simple, the rate of tax was reasonable, and the penalties for evasion harsh, most people will quietly pay their taxes. I am quite prepared for a special fund to be created out of my taxes to create an opulent bordello where we can banish the tax babus for them to get their kicks, and leave us poor folk in peace.

21 comments:

  1. kiwibloke7/11/09

    Nice one about the inanity of the Indian Legal System. One ca'nt expect more from a system which used the Indian Telegraph Act 1888 (Yes no misprint, 1888) to govern the Internet for its first several years in India! Try buying a House in Bangalore, you will realize that the taxmen were multiple split personalities who have classified it as "goods", "services" and "property". You pay a value added tax, a service tax and pay stamp duty and land registration tax!

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  2. The book of business and economics has hit 200 and began with 201. Here's wishing many more.....(so dumbers like me can get to know more and see the other side of business- selfish me!)

    LOL at the case of jam manufacturer. Never mind about Windows 7, anybody can always get a p------ version(not sure,if it can be spelled:P). Students are great at it! :P As you said, these laws only encourage that with a pat!!

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  3. @kiwi - Was that right ? 1888 ?? Wow !! I am sure the venerable Act still exists although telegrams have become history.

    @athivas - Thanks so much. So thoughtful of you. I am truly honoured.

    You know , I suspect you are a business guru hiding under the veneer of self deprecation. Just look at how perceptive and apt your comments are.

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  4. Ramesh,

    I completely agree with you about many of the tax babus. But not all of them are like that. i was once representing a TDS deduction show cause notice with an A.c In bangalore. The girl would have been some 28 years odd, i was amazed at her simplicity and down to earth nature. very much unlike the normal types who carry the aura of their position around their head. She pulled out her Income tax books and intellectually engaged as to why she believes her argument is correct. i was pleasantly impressed. atleast a few of them i have seen like this. it may be a little bit of generalizing based on limited exposure, but i feel, the new generation qualified lot and are quite professional. and this generation is growing, maybe not at the pace we would have wanted it to be though

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  5. Nice one Ramesh. After reading your post, with experiences of a CA student, I felt all these funny things add more case studies and CBDT/CBEC circulars for CA students to read :-) This term students will read packaged software available on a physical storage media are not to attract double taxation.
    Also a sigh of relief to corps like Microsoft/adobe/SAP/Oracle/gaming softwares from double taxation. Have a nice weekend Ramesh.

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  6. @Sandhya - There are many brilliant people in the IRS, but they have been trained to be irrelevantly brilliant. You do need high intellect to frame such elaborate twisted rules. Brilliant, but inane, perhaps sums up that lot.

    @kotla - Yes, learning such laws makes studying for CA, the equivalent of medieval torture ! Nice weekend you too.

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  7. kiwibloke7/11/09

    apologies for the wrong info, the venerable legislation is called Indian Telegraph Act 1885, first passed on 1 Oct 1885 and suitably amended by Act 11 in 1888. That's where the confusion came from!

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  8. 'Examples abound of such inanity' - I guess you meant 'insanity'.
    Even the newly composed 'Tax Code' in India touted to be simple to understand and hyped to make life easier for the tax payers is not so simple it seems. The 'Babus' will never let you have it simple.
    I thought you would want to banish them to 'Siberia' - but you wish them in a 'Bordello'!!!.

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  9. Do you remember the mythical "Ramamritham" that we used to talk about when we were younger?

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  10. Durga7/11/09

    A wonderful example! These are the kind of cases CA students get to study for their exams! Disgusting! I'm saying this, more so because I also studied such ridiculous cases to clear my taxation papers. On a lighter note, one needs to beat the creativeness of the tax babus by formulating DTAA between taxes! Whoever said that DTAA is applicable on income earned being taxed in 2 countries? It should also apply to income earned and taxed by 2 different tax laws within the same country!

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  11. @CMK - I am being kind to them. And the ever present danger that if we banish them to Siberia, they'll somehow find a way back !

    @dada - I desisted from naming in this post on the chance that I would offend a real life person of the same name !

    @Durga - Now that's a thought. Its seriously a good idea. Double Taxation agreement between Indian laws. Really cool idea.

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  12. CongratulAtions on the 200th post - isn't that what athivas was referring to. Interesting case - I wonder how many people will have to be paid off to fix the double taxation problem. The jam example is so hilarious.

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  13. Ohh I can already see my clan crying about what I was gonna come up with! But the funniest thing about that compilation of Case laws raghavendra mentioned was, there would be a case law to prove a particular act to be 'manufacturing activity' and just below that there would be another citation proving just the opposite!

    Income tax is even more bizarre... they collected Income Tax from Haji Mustan on his 'smuggling income' too. The logic being, Income is income, whether its legal or illegal.

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  14. @J - Thanks very much. Yes it was my 200th post.

    @Deepa - Did they do that !!! Tax Haji Mastan I mean ! Really bizarre .....

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  15. :D well apparently yes! we have been quoting that case in our exams too!

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  16. :) a means to enhance their importance!

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  17. //The book of business and economics has hit 200 and began with 201. Here's wishing many more//

    Congrats!! :) and thanks a lot for welcoming, informative posts :)

    Thats really insane, and the reason such things happen because sane ppl like u are not in the position to make laws easier simple and strict!

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  18. i meant the penalities to be strict ;)

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  19. @magiceye - Thanks for visiting and your comment

    @Sri - Thanks so much for your wishes. It means a lot. Much tickled by the thought that you consider me "sane" :-)

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  20. BTW India does no need official version...
    Within first two days of Windows 7 release, 1,00,000 pirated copies were sold in Lucknow!

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  21. @Adesh - Of course; we were talking only "officially".

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