BW Communities

Case Study: Inland Revenue, Outlandish Expense

BW Online Bureau Apr 29, 2015

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[Naren Kant walked into Menz for his weekly foot massage, a ritual he quite enjoyed. He was pleased to see Deepak, his masseur, back. "How good to see you, Deepak. How are things back home?" he asked. Deepak was also the manager at Menz, but he was primarily a farmer with some modest fields in his village. He explained in Hindi, "This time the crop was so good looking, I could not take my eyes off it! I got about 20 quintals of very good mustard and 10 of til." Kant broke into a slow smile as he saw the pictures of the fields on Deepak's mobile and said, "Issko kehte hain 'mere desh ki dharti sona ugle'!" They laughed together in joy as Kant saw two more frames of the field. Kant: "So you sold these - how does it work?" Deepak: I sell the crops standing, sir. I do not have the time to supervise or hire labour. I got Rs 50 per kilo for the til... and you know, sir, I came here and checked the price in retail - it is Rs 140 per kilo! Kant's eyes popped. "150 per cent add on? Wow! And where does it go?" Deepak: This is the cry of the common man, sir! For years this daylight robbery has been going on. Rs 50-55 goes to the businessman in the middle, and Rs 35-40 to the retail. Par isme bhi bahut beimaani hai, sir! The businessman is in cahoots with the local politician who will dictate how much to release into retail and how much to hoard. That depends on how much they want to artificially up the demand and hence the price. The politician makes a lot of money.  But what hurts most is the loss of freshness - the consumer never gets to enjoy it. And she pays thrice as much for something half as fresh! Just yesterday, Mrs Goenka was here for her little boy's haircut. She buys til in Singapore or the US! Kant shifted to an angle and asked Deepak,  "Are we a corrupt people, Deepak?" And Deepak said, "Sir, looking at the mantri log, aam aadmi bhi chhota mota beimaani kar leta hai, because baap log to karte hi hain na? (Common man also indulges in odd thefts because the 'fathers' steal anyway!) That evening, Kant stood on his 22nd floor verandah and took in the vastness of India he always enjoyed watching. To his left was the famous Dhobhi Ghaat, where every day he watched the quiet efficiency with which clothes were washed and laid out on the stones to dry. To his right shone the blinking neon lights of various brands, from atop their office buildings, like lighthouses of the marketplace. Somewhere in all this, he mused, lay answers to the hidden games at Delana India, where he was the MD - games that had their genesis in the distant past, when Kant was not part of the governance, but which now stood before him asking questions to which he was slowly finding answers. Deepak's words continued to ring in his ears. What irked was the fact that farmers like Deepak watched the thievery of their produce going on right under their noses and simply submitted to its wretchedness. Like Samar Das had done?Oh yes, he chided himself, thievery was going on right at his doorstep, too. Before he did something about it, he was going to find out what lay at the heart of the desire to thieve. Naren Kant called on Amish Panday, CFO of Vonika India, a white goods company. Panday had been a junior manager at Delana some 18 years ago, when Kant was factory head in Chandigarh. "In my 27 years of working, I have always seen people want to save on their payout to the government. Why is that so, Amish?" asked Kant. Panday (looking surprised): Naren, Naren, Naren... truth kya hai, poochho! Everyone in the corporate world hates the word 'taxes'; everything legal is done to ensure taxes are reduced. They feel taxation is punitive. You ask any true blue accountant and he will tell you that the tax laws are stomach-churning complex. The attempt, therefore, is to get out of its complex web! Do you know my reality? Day in and day out I am being hounded by my employers, telling me kuchh bhi karo, but cut my taxes - I am in a competitive world. Face it, everybody is doing it. What is my reality? I have to do it to keep my job! Naren took this story to Swamy Iyer, a batchmate of Panday and now business head at Gemmett India. Iyer: Naren, I have always wondered what is the objective of taxation in India. Each government - and the budgets reveal that - uses taxation as a ploy. It is punitive if you are high quality, punitive if you are an MNC, and liberal if you are low quality. It's a stupid warped sense of charity. The overriding message is, bad is adequate. Okay, let me tell you my story. I used to be the regional sales head for detergents at Teffer many years ago. One year, my boss trashed me in my appraisal calling me ineffective because I could not swing our market shares towards the low-priced detergent brands. All my convent school honesty, brahminic upbringing, ethics-shethics, which were my USP for being hired in sales, were now becoming a hindrance! Teffer made world-class detergents; but we got hit by high excise, high taxes, high every damn thing, so that our margins were nonexistent. The next thing we knew is that small-scale industry (SSI) status has been granted to manufacturers of low-priced detergents (LPDs). So a whole bevy of them in swirling skirts swept the market, calling their wares 'detergents' priced at Rs 6 a kilo! break-page-break The LPD was taking advantage of a definition. They set up numerous tiny companies in tinier sheds, used virtually no fixed assets, had abysmal working conditions, hired cheap labour, used virtually no electricity or power and produced a 'detergent', which they sold for Rs 6 against my Rs 65! Then these 'SSI-s' did not have to pay excise, got all the benefits they wanted, broke their production facility into 500 units and called each an SSI unit. But watch: each shed had the same machines and produced the same formulation and product, and was governed by the same management. But because they were in different names, they were different companies! Stretching definition? Interpreting law? Is that fair? Yet, only for the purposes of turnover, they aggregate, and scramble up the charts! Is this fair? I don't know. Is this ethical? I don't know. One day, my boss yelled at me and said, What the hell are you doing? Those guys are making money hand over fist selling a lemon, and you continue to lose money on gold!' What should I have done? I was getting angry with a system that appeared to promote a level playing field but, in fact, did not. In India, you get penalised for being successful. This is why nobody wants to show profits. So you come in for punitive taxation, punitive excise. We made world-class detergent, and we paid every kind of tax. They made a poor washing powder, and paid no excise. What is my take away? Being good is bad. Being bad is good! I cannot tweak quality; I cannot lower prices; I have the excise officer breathing down my back. I need high-priced sales people. I am paying and paying and paying... and, finally, after all this, my bottom line is thin as a wafer. And my boss is trashing me. Naren, for what? For what? And my boss told me, tum kuchh karte kyon nahin! But if I, too, stretch the definitions that apply to me, then I can have a decent bottom line... and why should I not? Isn't that what everyone is doing? Some people re-categorise their product so that it attracts lower excise. Some show more costs, hence lower profits, hence less tax. Legal, no? Naren: Is everything that is legal, also ethical? Legality is a function of both the prescription of the law, and your choice to interpret it in the spirit in which the law was made. Iyer: Good question, Naren, you answer it! The small manufacturers have been granted an interpretation of the law, but could these small brands actually be called small scale? See, it is not about right or wrong. It is about breaking the logic, interpreting the law in your own way, and the sole objective being to avoid taxes! This is the art of corporate warfare! It is not about law! My boss who appraised me as useless, was possessed by the demon of ethics and quality. The SSI was meant initially for the rural craftsmen and artisans. Detergent is not an art or a craft! But they extended it... saying cottage sector. Nonsense! If the initial spirit of the law was to enable a low-priced market, then all that was achieved. But was there a continued justification for the low-priced market to not pay taxes? Not pay excise? I am only questioning the ethics of designing a law. How did washing powder become an art? When a law has achieved the purpose for which it was created, it must be withdrawn and the beneficiaries should revert to the general law. But no! The LPD paid virtually no taxes!" The law had not 'spoken' to the people, thought Kant. Everyone carried an 'impression' of the law. Kant felt as if on quicksand. The more he tried to argue for taxes, the more he found the best of people tell him he was wrong! He met many friends in corporate circles, and asked them, "Many managers choose to bypass law if it can bring their company savings, profits, etc. That there is a desire to avoid tax as much as possible and many companies do acts they think are tax planning, but are, in fact, tax avoidance. Do you believe paying taxes is a waste?" M. Vasudevan (a business person in the US): What is it in the Indian psyche that 'works around' the law? Education does not consciously link taxes with public expenditure; many Indians moan that infrastructure is abysmal, but have they been taught to exact performance, exact value for money? There is a very deep level of hopelessness and cynicism regarding what the government is doing with tax money. Common knowledge sees taxes going into political pockets. Result: deep anger, deeper rebellion or an 'okay, since this is so much bigger than me, I won't pay my taxes'! Abhay K. Mohan (CEO of a large telecom business): I pay 33 per cent of all that I earn as tax, and then find that I hire my own security, I have to buy a genset for electricity, I buy Bisleri to cook food, and for every service that I get, I pay sales or luxury tax. Why? Mr Nani Palkhivala used to say, 'The salaried class is the most honest tax payer'. But that honesty is a choiceless one! If they could avoid that TDS, they will. Many of them make up for it by evading tax on other incomes such as rent, capital gains, etc. Why? It is the choice the individual and the corporate is making  and that choice differentiates tax evasion from avoidance.  What is happening to the choices people are making, Naren? History talks to us about people who made tough choices... why not any more? Naren: That's my thought too, choices. I feel that for good acts like philanthropy, etc., you need role models. But wrong acts cannot be blamed on role models. These are choices we make! So when CFOs think of tax as wasteful.... Mohan: Yes, I agree, but it is the helplessness within that the money is being wasted. Media, courts, bankers, directors, principals, judges, ministers... all are pointing the wrong way! The middle class, pay whatever is the minimum tax and just forget about it. For them, it is peace bought for a price. The poor man is becoming poorer. The government is making hay. The rich are stashing money away. So where is the tax going? Non-plan expenditure in this country far outweighs planned expenditure. Cost of governance is so unproductive for the governance you get. It seems we are just managing to survive. How many scams and how many misadventures can we fight? There are only two choices: evade or avoid! For some, flight is an easy option. For some, avoid is the new 'cool'. I pay my tax not because of any commitment, but as a barter for peace. No one knows where the money is going. Yes, Jaagore tells me that as a common man I must make my choice of leader. But today, between all the political parties, it has become a Hobson's choice. Hariharan (CFO of an FMCG company): At board meetings, all directors say to me, 'My God, look at your tax pay-out. Have you not thought of better tax-planning?' So what are we talking about! The law is to blame. The way the tax structures are defined, it invites scheming tax avoidance. For example, tax law in India says, if you are earning X amount, pay Y tax. However, if you are doing Z, you can pay less or get a deduction and so on. Why should the 'law' talk about planning? A law's job is to state the law and the penalty. Full stop. No wonder then that the individual is led to ensuring that Z is done legally and thus pay less tax. Naren, if our tax laws simply said if you are earning X, pay Y tax, all scheming will end! These so-called exemptions lead scheming minds to plan tax avoidance and then the law tries to fill the hole by making even more complicated tax laws. This is so absurd! Then there is the whole attitude to taxation itself. Take Section 115 J. It was introduced, withdrawn, reintroduced and probably withdrawn again. So that the Section has moved from 115 J to 115 J(a) to 115 J(b), etc. Can you see the underlying attitude? Give a sop, take it back, then give it again, then take it back.... These tax deductions are not meant for making savings for me, but are meant as tools for use by the government of India! break-page-break The acceptance of corruption at all levels is strengthening the resolve to avoid or evade tax. Some are prepared with Plan B(ribe), should their tax evasion be caught!   Naren: So you think it is a waste? Hari: Isn't it a waste if it is not serving its purpose? The toughness of our tax administration is a function of our structure where centre-state relations are most important. There are Central taxes and state taxes.... Due to this, today the number of taxes and tax laws are numerous - income tax, TDS, VAT, CST, GST, excise, service tax, octroi, entry tax, custom duty, R&D cess ... baap re! Even the tax payer ends up feeling 'look, every damn thing is taxed'! These complicated taxes are also the result of a desire to block tax drainage caused by scheming tax avoidance strategies. Why have so many laws? On the positive side, there is intention of streamlining and simplifying taxes - an example is the GST (goods and service tax), which is meant to merge all complicated indirect taxes into one tax, remove fringe benefit tax, and so on. However, the corrupt decision makers will ensure there are enough complications built in, for them to make a quick buck. The psychology behind paying taxes is the fear of prosecution! The leadership has to examine behaviours and wake up the Buddha within, then there will be a better system. It is finally how the leadership portrays taxation! Amarjeet (an executive coach): The scams are a slap on the face of honest citizens, proving beyond doubt that taxpaying citizens are the biggest fools. Sadly, the ones who should care for the sick are causing their death; the ones who should protect the citizens are the biggest threat to them; and the ones who manage the country are just managing themselves!" <img src="/businessworld/sites/default/files/case-taxation1_mdm.jpg" width="200" height="208" style="margin-left: 5px; margin-right: 5px; float: right; border: 5px solid black;">Naren then met his ex-mentor, Nawshir Khurody, who said, "Taxes when seen as 'delivering value' are paid willingly (witness Scandinavia). When seen as a 'cost', they are avoided legally, strategically and illegally. But where there are very high tax rates, you will have a tax-planning or avoidance, industry. The UK and India, for example. Nonetheless, those who believe in the law being sacrosanct, pay taxes, however unjust and poorly spent. And, this is not out of fear of being caught, but because of an ethic gene in the DNA. We are trapped in our squares of obedience.I learnt from my economics teachers that the pillars of societal development were the generation of wealth for the public use. Where is the wealth generation?! Sniggdha (business studies teacher ): Naren, no serious pontification needed. The writing is there to see, we have chosen to play blind man's bluff. Simple question: why do we pay taxes? To finance public expenditure. What is public expenditure? Roads, drinking water supply, electricity, infrastructure, healthcare, hygienic conditions, and if some is left over, then pretty sights. Can you name even one of these that you get 100 per cent? Naren, you have a son in post-graduate school. You pay a bomb out of your earnings for his fees and whatnot. Say, you keep sending money and he does not even attend college... will you continue to pay fees? In western countries, you actually see your money working. The streets are beautified. Flowers hang by the side of the road. Public toilets are clean. Bus stops have seats and rain shelters. Subsidised buildings have fresh coats of paint. Cops protect and help. So you know that the money that you have paid is working. In our country, you pay your taxes and it does not show! Why will you pay? Classroom Discussion What are we trying to avoid: paying tax or being responsible? casestudymeera(at)gmail(dot)com (This story was published in Businessworld Issue Dated 25-04-2011)