12 January 2008

Experiences with the Income Tax Department -- 3
[A single-page version of this blog can be seen here]

The story proper begins in 2000.

That was the year of the first Internet mania. People were talking in terms of hits, eyeballs and ADRs. In the popular jargon, new issues were replaced by initial public offers. A higher form of life called the venture capitalist struck roots in India. In certain circles the dollar seemed to be the new Indian currency, and the smallest unit thereof was a million dollars.

Sabeer Bhatia became the darling of the Indian elite. People looked up to Gururaj Deshpande, and one-PC-in-bedroom startups dreamt of becoming the next Exodus Communications, a successful US company set up by two Indian boys who had come good (it was later to go bankrupt but that is to run ahead of the story). Chain mails claimed that 40% of NASA's engineers were Indians, as were 50% of Microsoft's; it was obviously only a matter of time before the Microsoft chairman would be a Mr Ghate. Anecdotal evidence had it that US VCs were rejecting venture capital solicitations if the team did not include at least one Indian. India was the flavour of the day. And big companies realised it was a good idea to buy small Indian start-ups, scale them up, and collect a few hundred million dollars through an ADR. No one wanted to spoil the party by thinking of what would come after that.

Who was I to complain? At the height of the mania, I sold a website. The realisation was nowhere near the figures being bandied about for other websites, but it was enough to catapult a journalist into relative opulence. And there was the pleasure of knowing I would not have to work for a couple of years. There were sundry expenses too, but detailing them would distract attention from the main issues.

To normalise the figures, let us say that I received Rs 100 and of this Rs 50 was paid to a software developer named X. Since I received a net of Rs 50, about Rs 17 was paid in tax. In 2001 I filed my return. The joy derived from the enhanced bank balance apart, it also gave me immense gratification to pay a large amount in tax. I had graduated from the Indian Institute of Technology, Bombay in 1984 but the jobs I held thereafter did not have even a remote connection with technology. So there was always a feeling of guilt that though the government had spent considerable money on my education I had not repaid it. Now here at one stroke I was paying back the subsidy on my education several times over.

On 25 November 2002 I received a letter from Mr Joe Sebastian, Jt Commmissioner of Income Tax, Mumbai, asking me to present certain documents and make myself available for a meeting with him. This, I thought, was a routine letter. I had heard that the Income Tax Department occasionally felicitated honest assessees who paid a large amount in tax. So, if not a bouquet I hoped for at least a single nicely-shaped rose at a quiet ceremony at Aayakar Bhavan. I would be modest, of course, in accepting it. The Walter Mitty in me was soon to be woken up with a rude start. A little later I learnt from my chartered accountant that the income tax official scrutinising my return was inclined to view it harshly. This came as an unpleasant surprise and I decided to engage an income tax consultant.

On 13 January 2003 I was summoned for a meeting and accordingly presented myself along with my accountant and the tax consultant. From the outset it was clear that Mr Sebastian's attitude was hostile. After hearing an account of how the site was developed he dropped a bombshell. "I am going to disallow the entire amount paid to Mr X," he said.

To say that I gaped at him open-mouthed would be a bit of an exaggeration, but it is probably safe to say that even a moderately enterprising fly could have easily pushed its way into my mouth at that moment. The reason for the shock and disbelief should be apparent. He was threatening to treat my income as Rs 100, whereas I had received only Rs 50. So I would have to pay another Rs 17 in tax, along with whatever penalty he thought fit to impose, which would amount to an income tax rate of 67% or more. Even worse, I would probably have to start working again, not a bright prospect since I had moved to a small town where the prospects of employment were bleak.

After I recovered somewhat I asked, "So what does that make the money I paid to Mr X. A gift?" Mr Sebastian smirked. He added, however, that this was only a preliminary opinion and he was ready to hear our arguments.

The journalist in me was quite curious as to how this gent could really hope to make his threat stick. Anyway I decided to call his bluff, and asked my CA and tax consultant to ask Mr Sebastian to state in writing what he had just told us.

A note of warning at this stage. The tone of this blog so far has been mostly one of light banter. But that is about to change. And it could hardly be otherwise. If you had hanging over you a threat to lop off half your bank balance you would hardly be blowing kisses to Mr Joe Sebastian, be he ever so beautiful.

I have friends who bury their woes in a few pegs of liquor at the Press Club. Me, I write letters.

More in the next.

Category: Income-Tax


Philip George
Debunker of Keynesian, monetarist and Austrian economics

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