Sucheta Dalal :Satyam Scam: Bad policies encourage loot
Sucheta Dalal

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Satyam Scam: Bad policies encourage loot   

January 15, 2009


This letter is written by the head of an Information Technology company who, for obvious reasons does not want to be identified. He outlines how bad government policies and generous, thoughtless exemptions – all at the cost of the taxpayer have encouraged IT scams.
 This is in context with the cover report on "The Truth about Satyam" featured in MoneyLIFE magazine (15 January 2009), and the many other reports on their most recent adventures, since Satyam and adventures are not really new to each other. In actual fact, the truth behind Satyam was well spelt out at the end of your report, where you state that 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 infotech companies in India, there seems to be some sort of justification attempted to be trotted out by a variety of fellow travellers, trying to bring in national prestige and credibility as an excuse for daylight robbery of the national exchequer and the public behind it.
So what's at the root of this, then? How is it that companies which benefit by thousands of crores of rupees in tax exemption 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, which may also occur again? What provides the framework for such repeated fiscal football, going from end to end, faster than any other "game"?
The answer is simple:- STPI. A "scheme" that has lived through its usefulness as far as real infotech industries are concerned, but seems to be around still, 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 infotech companies in India which declared huge tax-free profits and then went under or simply vanished. 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 turned their chips in. A simple analysis of the top-20 lists with NASSCOM over the last decade will provide a good example of this phenomenon. A slightly more complex examination of the way the STPI scheme is actually performing, will give even more indications that things are terribly awry.
From being a facilitator and incubator for infotech companies, the STPI has become yet another den of inspectors and officials, who in league with the other government bodies, are there simply to permit all sorts of duty-free imports and tax-free exports. Since real life infotech exports doesn't really need this exemption anymore, 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 of all sorts. Payroll, allied expenses and more - the more employees you show, the higher they can be. And in the corresponding billing as well as dummy profits part - more fictitious employees means higher billing and therefore higher paper profits. A simple double-check would involve finding out how many employees such infotech companies have with registered the EPFO, but then, that's often not easy to do because the EPFO's own records are in tatters, too. But just one number should give an example - Satyam claims 53000 employees, but at their second largest centre, in Pune, they have just about 4500 employees. The maths simply doesn't add up, does it?
Satyam is not a one-off 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 constituents 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 makes it all the more amazing that elements from NASSCOM have been put in charge of the revival of Satyam.
To fix this sort of problem, one has to go into the deep roots, and pull away the real rot. And that will happen only when tax exemption of expenses as well as revenues in the infotech sector is done away with. Otherwise, like the fertiliser sector, the tax exempted infotech companies will simply become like sucklings addicted to not being weaned off the mammaries of the state.

-- Sucheta Dalal