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Wednesday, 19 January 2011 00:00
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What Senator Charles Schumer wasn’t able to do to India’s software industry when he called Infosys a chop shop (he later clarified this to mean it was a body-shop or simply an exporter of cheap labour), India’s own income tax department has done. Tax officials have asked Infosys to pay Rs 400 crore as taxes on its software exports, except the taxman says these aren’t software exports—which are not taxed under the STPI/SEZ rules—but are revenues from body-shopping. Since roughly half the revenues of India’s IT industry come from software exports, the impact could potentially be huge.

It will, of course, be very tough to prove that what Infosys does is body-shopping. Body-shopping refers to a situation in which a firm simply hires people in India and sends them to work overseas, at a hugely higher salary—since the employee works for the foreign firm, the Indian firm does not monitor the employee’s work nor does it do any project management. So, to prove Infosys is indulging in body-shopping, it will have to examine its contracts to show that this is the case. If Infosys is, however, sending its staffers to work on the clients’ premises (on-site work) and this is a part of the work done for the client from India, and the on-site work is monitored from the Indian firm, this cannot be classified as body-shopping.

At times, large tier-1 firms do take people from certain body-shopping companies, mostly when they need to ramp up a project fast. It typically takes two months to recruit people for a project and they are taken on board on a sub-contractual basis and are paid sub-contractor fees. However, the delivery is still managed by the large tier-1 firms, and once that happens it does not amount to just body-shopping. The large companies are accountable for delivery. All customer contracts have penalty clauses and there may be repercussions if the customer is not happy in terms of invoices getting rejected. It will be now interesting to see how the tax authorities proceed in the case of other leading IT firms. Infosys has gone on record that it will appeal against the order, which it has termed as ‘arbitrary’. The next few weeks could throw up some interesting drama on this front.

 

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