The Hindu Business Line : Taxing BPO

VIEWED PURELY FROM the perspective of core principles of income taxation, the recent circular of Central Board of Direct Taxes on taxation of outsourcing activities by overseas enterprises for captive consumption can hardly be faulted. What the CBDT is saying is that when an activity is undertaken within India's borders and is seen as contributing to profits, it is only appropriate that the enterprise offers for taxation that portion of its profits derived from the activity performed in this country. As further proof of its good faith, the CBDT has also made it clear that it would not attempt to tax all manner of activities that an overseas enterprise may perform in India as part of its global operations but would confine its attention to only such of those functions that have a significant bearing on the income earned by an enterprise.

Having said that, it must also be agreed that the concerns of Nasscom, the trade body of software and allied services, are not entirely without merit. The problem with the CBDT circular is that what it has chosen to spell out by way of illustrative examples of non-material outsourced activities does not lay down a rigorous framework for delineating from among the range of activities that can universally be recognised as non-core and hence outside the purview of domestic income taxation. It has spelt out cases such as customer support, insurance underwriting and scrutiny of credit-card applications as typical examples of such activities that are expected to be treated as non-core. This is hardly of any help in determining the taxability of a vast range of other business processes that are being or will be outsourced to India. To compound matters, the CBDT has talked of exempting only such of those transactions that are invoiced by the local affiliate on its overseas principal "on an arm's length" basis. It is by no means clear if outsourcing done as a purely departmental activity without any invoices being raised for the service would be subjected to tax on a notional basis. That would certainly be inequitable. If the transactions themselves are deemed as insignificant to the larger income earning process of the overseas principal, then it matters little whether they choose to resort to internal accounting for these transactions or not.

Moreover, given the constantly expanding range of services that are outsourced by overseas corporations, the limited list put out by the CBDT as examples of non-core activities would hardly inspire confidence in these entities contemplating relocating some of their operations in India. Such lack of clarity is only bound to add to the apprehension in the minds of prospective investors. There is also the larger issue if such vital questions of taxation are to be left to the discretion of lower level functionaries in the tax administration instead of the legislature drafting a law. The issue clearly calls for a wider public debate.

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