The Hindu Business Line : Finance Ministry clarification on BPO taxation

THE Finance Ministry has clarified that foreign/non-resident companies setting up business process outsourcing (BPO) units in India to undertake "incidental activities" on their behalf will have to pay tax on the "insignificant profit" generated by such activity.

The income to be chargeable to tax would be limited to the "insignificant profit" derived by the BPO unit that has been established in India by the non-resident company for undertaking "incidental activities" on its behalf.

Thus, a foreign credit card company issuing cards to customers in the US, which sets up a call centre in India to attend to calls and disseminate information to these overseas customers, would be taxed only on the "insignificant" profit earned by the call centre and not on its income earned outside India. The foreign credit card company would not be taxed for incomes other than the income of the call centre, if the charges paid by it to the latter for its services rendered are at "arm's length or fair market price".

The Ministry has, at the same time, made it clear that in case a foreign company outsources its "core revenue generating activity" (in contrast to "incidental activities") to a BPO entity in India, a "considerable portion" of the profits derived by the non-resident parent from its customers abroad would be deemed attributable to the activities of the BPO unit here.

"If such an entity constitutes a permanent establishment of the non-resident company in India, such attributed profits would be taxable under the Income Tax Act, 1961 in accordance with the provisions of the relevant tax treaty," the Ministry has said.

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