Friday, November 6, 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.