Sunday, February 01, 2009

The Indian Software Exports Scam

The 12th Feb issue MoneyLIFE magazine has published a letter from an unnamed head of an Indian IT company. The letter does a great job of explaining why the whole software export business is a scam. About seven or eight years back, I was arguing with a friend that this whole 'Software Technology Park' (STPI) idea was not a good way to encourage software companies. A software company that's part of a government anointed STPI gets various concessions.

(Note: The letter is not online yet. I will update the post with a link later.) Done.

The letter:
This is with regard to your cover story “The Truth about Satyam” (MoneyLIFE, 15 January 2009), and other reports on Satyam’s most recent adventures, which are not really new. Actually, the truth behind Satyam was well spelt out at the end of your report – what Satyam did was not way out of line – inferring that most other companies in India would be guilty of similar creative accounting and governance methods. But, with IT companies in India, there seems to be some justification trotted out by a variety of fellow-travellers, who bring in national prestige and credibility as an excuse for daylight robbery of the national exchequer and the public.

So, what’s at the root of this? How is it that companies that get the benefit of tax exemption worth thousands of crores of rupees now appear to be getting more money in thousands of crores from the government for, of all things, reviving the possibility of even more tax evasion? Never mind the diversion of profits that may also occur again. The answer is simple: a scheme called Software Technology Parks (STPI). This is a ‘scheme’ that has outlived its usefulness as far as real IT industries are concerned. But it seems to be around only to permit such scams. It is a fact that the STPI scheme, used by Satyam and misused by so many others, is at the root of the large number of IT companies in India, declaring huge tax-free profits and then going under or simply vanishing. By modest estimates, over 96% of the companies registered under STPI came in, took their tax exemptions on imports, took some more tax exemptions on export profits, and then disappeared. A simple analysis of the top-20 lists with NASSCOM over the last decade will provide evidence for this. A slightly more complex examination of the way the STPI scheme is actually performing will give an even better indication that things are going terribly awry.

From being a facilitator and an incubator for IT companies, the STPI scheme has become yet another den of inspectors and officials who, in league with other government bodies, are there simply to permit all sorts of duty-free imports and tax-free exports. Since real IT exports don’t really need this exemption any more, it is only the scamsters who increasingly benefit. Simply put, buying computer hardware is now cheaper if done directly, without using import duty exemptions. The real game here, as always, is in over-invoicing; and non-existent imports followed by equally non-existent exports.

The second important parameter which needs to be brought out is the way headcount is multiplied, for assorted benefits especially towards showing and booking higher expenses on payroll, allied expenses and more – the more employees you show, the higher these can be. And, in the corresponding billing as well as dummy profits, more fictitious employees mean higher billing and, therefore, higher paper profits. A simple double-check would involve finding out how many employees such IT companies have registered with the EPFO (Employees’ Provident Fund Organisation); but that’s often not easy to do because the EPFO’s own records are in tatters too. Just one number should suffice. Satyam claims to have 53,000 employees; but, at their second largest centre in Pune, they have just about 4,500 employees. Where are the rest? It simply doesn’t add up.

Satyam is not a one-off or stand-alone scam. There are many like them and one would have presumed that those in charge at NASSCOM would have taken action against such members of their association well in advance. The fact that they haven’t, makes one suspect that all is not well with NASSCOM too. And, therefore, it is all the more amazing that elements from NASSCOM have been put in charge of Satyam’s revival. To fix such problems, one has to go deep into the roots and pull out the rot. That will happen only when tax exemption of expenses as well as revenues for the IT sector is done away with. Otherwise, like the fertiliser sector, the tax-exempt IT companies will simply be like addicted sucklings not being weaned off the mammary of the State.

The writer heads an IT company and does not want his name to be disclosed. – Letter by email

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