the expected Rs 8,000 crore from the services sector in 2003-04
will likely prove near-impossible. Why? Because the definitions
of the new categories to be taxed are so broad and ambiguous that
most experts think the government will likely spend the coming fiscal
fighting court cases rather than counting money.
Take, for instance, the first new item on the
snip-list, the rather vague-sounding ''business auxiliary services''.
While the Finance Bill 2003 does spell out what such services include
(promotion or marketing or sale of goods produced or provided by
or belonging to the client; any incidental or auxiliary support
service such as billing, collection or recovery of cheques, accounts
and remittances), it leaves out it services.
That silence has led to a whole lot of confusion.
For one, there's no clarity on what are the categories that fall
under it services. Therefore, BPO companies, which fall under the
head of it-enabled services, want to know if they will be taxed.
Nasscom, the industry's apex body, is hoping that they won't be
and points to the statements made by the Finance Minister and the
Chairman of the Board of Excise and Customs to that effect. But
tax experts like S. Madhavan, Partner, PricewaterhouseCoopers, aren't
so sure. ''The provisions proposed in the Budget do not provide
for exemptions to it-enabled services. Therefore, technically, they
Compounding the problem is the fact that since most call centres
were being paid in foreign exchange, they were anyway outside the
purview of service tax. Now with the exemptions gone, call centre
services rendered in India would have to pay tax, whether or not
the payments for such services are received in foreign exchange,
argue experts. Again, even if call centres were to be brought under
the broad purview of ''it services'', a whole lot of questions pop
up. ''What happens to a call centre that does part of the work through
it and partly through labour, providing help desk-support services
over phone with regard to any equipment or services. Will they still
be outside the tax net?'' asks Roshan Shah, Partner, RSM & Co.
| Putting The Hurt
Not surprisingly, affected services say
the new tax will hurt them.
India's new hope, BPO businesses say the 8 per cent tax will
make them unattractive compared to rivals in Ireland and the
Philippines, since price is one of their biggest advantages.
Here again, the argument is compelling: Since most of these
institutes teach computer skills or mathematics or science subjects,
they say students will be impacted.
They say the government will end up encouraging hole-in-the-wall
repair shops. But that may not be totally true, since the tax
will be loaded on to the customer's bill.
A growing digital divide. How's that for a bogey? Pretty good.
Fewer internet cafés would mean fewer people on the internet.
Similarly, a host of other issues will still
need to be clarified. For instance, what happens to medical transcription
companies, which are currently outside the service tax net, if they
decide to analyse the data provided to them rather than merely format
and transcribe the data, since testing and analysis services have
now been brought under the service tax net? In any case, the BPO
industry is pleading exemption for the sake of global competitiveness
(See Putting The Hurt).
These issues, however, pale in comparison to
the challenges the governments (Centre and state) will face in divvying
up income from the 61 new items. As things stand, service tax is
imposed and collected by the Centre. But a government-appointed
committee is currently examining ways in which the states can extract
their pound of flesh. The problem, however, will be in taxing multi-locational
companies. For how does one tax, say, a Delhi-based consulting firm
if it travels to a client's site in Madhya Pradesh? Notes Rajeev
Dimri, National Leader for Indirect Taxes, Ernst & Young: ''There
is a lack of clarity on a whole range of issues.''
One, however, cannot fault the government for
wanting to tax services. With projected revenues of Rs 2,36,936
crore in 2002-03, services represent the fastest growing part of
the economy. it and it-enabled services alone are expected to touch
$57 billion (Rs 2,72,175 crore) by 2008 (a Nasscom-McKinsey estimate).
Then, there are other emerging services such as entertainment centres
and builders (still not included in the tax net) that could further
expand the non-industry, non-agriculture pie. Says Dimri of E&Y:
''I am all in favour of extending the service tax net in the most
comprehensive manner. After all, in developed countries goods and
services are taxed equally.''
The Finance Ministry is yet to issue notifications
clearing the confusion, but sources in the ministry say they should
be put out by the end of March or early April. But what's likely
is that the government may go back to the drawing board and take
a fresh look at all the services it wants to tax and figure out
a foolproof way of doing so. In case it doesn't, the only service
providers happy with the mess will be the lawyers.
|Digital Globalsoft's Som Mittal: Speculations
In The Air
is speculating a Digital Globalsoft-HP merger.
To punters on Dalal
Street, it's no longer a question of whether Hewlett-Packard will
merge its software and it services company subsidiary with itself.
The only question, according to them, is when. It's hard to disagree
with the Street. After all, hp holds the majority stake in the company
led by Som Mittal. A good 85 per cent of Digital's revenues comes
from services provided to hp, and-let's face it-Digital is also
generating oodles of money (ITS EPS jumped 70 paise to Rs 8.22 in
the quarter-ended December 31, 2002). The company itself is mum
on the rumours, although BT learns that a committee comprising its
independent directors is working on stuff like valuations and merger
Hordes of BSNL subscribers are giving up on
the last two years, 29 lakh consumers have surrendered their BSNL
fixed phones. In 2001-02, the number was 13.5 lakh and in the current
year (up to January end) 15.4 lakh connections have been cancelled.
Although BSNL is putting on a brave face citing the fact that net
subscriber additions are positive-53 lakh in 2001-02 and 30 lakh
this year-the revenue impact is causing many a brow in top management
to crease. After all, telephones accounted for 93 per cent of the
company's income of Rs 24,300 crore last year. A small consolation:
its mobile subscriptions are booming.
SEBI has proposed a 64-page code of
conduct for the Street.
If G.N. Bajpai has
his way, Dalal Street will soon have to put on its best behaviour-and
keep it. The Chairman of SEBI has rattled Dalal Street denizens by
proposing a 64-page manual on how they should behave. Inspired by
the Securities and Exchange Commission's crackdown on Wall Street,
the guidelines pertain to 12 categories of market participants: FIIs,
merchant bankers, portfolio managers, debenture trustees, bankers
to an issue, stock exchanges, stock brokers, depositories, depository
participants, registrars to an issue, share transfer agents, and research
|G.N. Bajpai: New rules to play by
What do the guidelines say? Here's a sample:
Disclosure of compensation to research analysts has been made mandatory;
Merchant bankers and brokers have to disclose their holdings in
the company on which research report is put out; and FIIs are not
to trade in securities they do not hold.
Not everybody is happy with Bajpai's work.
Says Prithvi Haldea, CEO, Prime Database: ''It is great to have
a code of conduct, but a better alternative would be disclosure
of daily trades by all the market participants.'' If the proposals
end up having the desired effect, then Bajpai may just succeed in
bringing the small investor back to Dalal Street.
Consolidation's New Champ
ICICI Bank's K.V. Kamath wants telcos to unite.
|ICICI's Kamath: Worried lender
t may be reforms' poster industry, but telecom
is far from the perfect model for lenders. Its tariffs are the lowest
in the world, markets are growing but not fast enough compared to
some other countries, and there are more players than there's room
for. At least that's what big sector lenders such as ICICI Bank
seem to think. Its CEO K.V. Kamath's has been the leading voice-from
the lenders' quarter, that is-exhorting consolidation in the industry.
Not only are smaller players such as Escotel and Hexacom under immense
pressure, but the bigger players are also hard-pressed to turn in
profits. At last count, there was some Rs 5,000 crore of bad loans
in the telecom industry. Therefore, lenders such as ICICI simply
cannot afford the smaller telcos to fail.
Attorney General gives a clean chit to the Centaur
cried foul and disinvestment came to a momentary halt after it emerged
that Batra Hospitality, which had bought state-owned Centaur Hotel
in Mumbai for Rs 83 crore, had sold the property to Sahara for Rs
115 crore. The government has been cheated of Rs 30 crore, cried
its critics. Ban disinvestment, cried some indignant others. But
now the Attorney General of India, Soli Sorabjee, has given a clean
chit to the sale, saying that no rules have been flouted. May be
it's time the government-and its opponents-understood something.
Once you sell something, it's sold. Period.