1. We need PoEM like we need a bullet in the head

We need PoEM like we need a bullet in the head

With the Place of Effective Management rules, we are devising a new Permit-Licence Discretionary Raj that will successfully drive away both foreign and domestic investment

By: | Updated: January 5, 2016 12:37 AM
If you are a global technology company, Bangalore could be the logical place to set up your Asian regional office. But the moment you set up an office,  tax-collectors will use the new PoEM rules to send you a bill to pay taxes on your company’s income from all Asian countries! Singapore will never do such irrational things.

If you are a global technology company, Bangalore could be the logical place to set up your Asian regional office. But the moment you set up an office, tax-collectors will use the new PoEM rules to send you a bill to pay taxes on your company’s income from all Asian countries! Singapore will never do such irrational things.

The mandarins of our capricious Income Tax Department are at it again. They are determined to sabotage the Prime Minister’s stated intention of making it easier to do business in India and the finance minister’s stated objective of getting talented Indians who have been driven away by irrational tax rules to return to India. It is almost as if India’s bureaucracy is on the payroll of the Singaporean government. Every move that they initiate only helps Singapore attract businesses, high-quality talent and tax-paying residents.

The Place of Effective Management (PoEM) is the latest attempt in this area. The positioning of PoEM as “conforming to international standards” and as “needed in order to prevent MNCs from shopping across tax jurisdictions” would be comical, if the almost certain consequences of it for India were not going to be tragic. We are devising a new Permit-Licence Discretionary Raj that will successfully drive away both foreign and domestic investment, lead to rise in transaction costs for businesses, increase litigation in our tribunals and courts, increase harassment by our notoriously citizen-unfriendly tax-collectors, and make lawyers and accountants richer. It is almost as if we want to slip a further 20 points down on the ease-of-doing-business scale.

The finance minister told the country on the floor of Parliament that he is concerned about the fact that Indian fund managers are relocating outside the country. Fund managers are highly paid and represent important human capital. India is the only country that consciously exports high-value service jobs. So the finance minister amended the law and thought he had done his bit. He forgot about the sting in the tail of the scorpion, which our bureaucrats specialise in. When the “rules” were announced, the mandarins included a clause that the fund managers should not be managing round-tripped funds. Now what has income-tax got to do with round-tripping? If you want to go after round-tripping, there are KYC rules and there are anti-money laundering laws. In any case, is it the contention of our great Applebys that it is perfectly in order for round-tripped funds to be managed from Singapore and not from GIFT (the Prime Minister’s favourite) and BKC (Maharashtra chief minister’s favourite)? Net-net, our bureaucrats have ensured that the favourite destinations of our leaders will specialise in low-end data-entry jobs, while Singapore will get the bulk of the high-end managerial jobs. This must seem to them a fair division of labour! The finance minister should note that his objectives have not been achieved. Not one fund manager has returned. In fact, many more are leaving or have already left.

Consider this monstrosity known as PoEM.

If you are a global technology company, Bangalore could be the logical place to set up your Asian regional office. But you would not dream of it. The moment you set up a regional or a division office in Bangalore, our tax-collectors will use the new PoEM rules to send you a bill to pay taxes on your company’s income from all Asian countries! Singapore never has done and never will do such irrational things. So off you go to Singapore where, in fact, many of your senior staff in your regional office will be—you guessed it, Indians or Singaporeans of Indian origin.

If you are a global BPO company with extensive operations in India, in any event you have over the years moved out many jobs to the Philippines, as your friendly income-tax officer has been harassing you over transfer-pricing issues. Now you will even stop having the occasional board meeting in India. The Prime Minister would like tourism in India to grow. Having board meetings in India results in some very well-heeled tourists coming to our country. But now they won’t. They will rather go to Cambodia and see Angkor Wat rather than come to India and see the Taj.

If you are an Indian company and you have operations in the Middle East, then you will go through elaborate circumlocutions to ensure that the managers of your Middle Eastern operations have nothing to do with your Indian head office. You will be denied operational ease and once again your costs will go up, rendering one more set of Indian companies that much less competitive globally.

The Chinese government actively supports Chinese companies. Here we have our government, not just being neutral, but actively troubling Indian companies and reducing their ability to compete. One wonders if it is the desire of our bureaucracy to eliminate all Indian businesses and make India a country exclusively of NGOs.

The argument that India must play its role in preventing “shopping across tax jurisdictions” is ridiculous. India must attract investment, both domestic and foreign. India must focus on creating jobs across the value chain in the country.

Consider Ireland. They are least concerned that President Barack Obama is upset because American companies are relocating to Ireland, which is attractive for tax reasons. The Irish happily accept the jobs that are created and the taxes that are locally paid, even if at a lower rate than elsewhere.

Consider Singapore. They have an active policy (which their civil servants do not sabotage, but actually implement) to encourage regional headquarters of global companies, analysts, fund managers and senior managers of companies whose businesses are outside Singapore and so on. They even seem to attract many retired Indian bureaucrats to live there. They do not worry about Obama’s concerns. They do not kill geese that lay golden eggs. They offer low, predictable, simple, rational tax rules. And guess what, they do collect taxes that countries like India lose. Everyone in the business knows that the US is not a good country to imitate for its tax laws, rules and processes. But just look at India’s new foreign asset reporting requirements. They are almost word-for-word copied from US rules. The consequences, intended or otherwise, are that over the next few years we are going to keep driving away expat techies, expat managers and even Indians who happen to have residencies in other countries. Driving away talent is perhaps prescribed in the tax-collectors college as one of the goals that should be relentlessly and inexorably pursued.

Since there are so many permutations and combinations around PoEM, every transaction, every administrative arrangement, every reporting relationship, every board composition, every meeting, the minutes of every meeting … all of these will have to be constantly monitored by a large PoEM Compliance and Monitoring Department, increasing the overhead costs of all companies who operate in India, making all of us less competitive, so that our exports can continue to decrease and our imports (from countries that are more benign towards their businesses) can continue to increase.

Clearly, we may not Make much in India except compliance services. But I guess when we write the report card, we can always say that Indian companies have then largest compliance departments and the largest legal and accounting bills. Aha, there is some place where we will be world-class and where our global market share will be something that we can be proud of. So here’s three cheers to PoEM. Let’s have it. Let’s have lots of it. Let’s have it as complicated and discretionary as possible. Let’s do it now.

The author is a Mumbai-based entrepreneur

  1. R
    Rara
    Jan 7, 2016 at 5:29 pm
    Good observations. Sadly the tax bureaucracy is filled up to the top with those who are in it purely to line their own pockets using the draconian discretion they have. As you say, the right response is to leave if you can. No point in fighting a pig in the muck - you get filthy while the pig enjoys it!
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