The Hindu Business Line : BPO tax regime stays; industry disappointed

THE Finance Ministry on Tuesday made it clear that its stance on taxation of business process outsourcing (BPO) units operating in the country remains unchanged.

"The Finance Minister's statement on BPO taxation is a reaffirmation of what the January circular of CBDT (Central Board of Direct Taxes) has said," the Revenue Secretary, Ms Vineeta Rai, told mediapersons here at a post-budget press conference.

In his Interim Budget speech, the Finance Minister, Mr Jaswant Singh, said it has been clarified that if outsourced services are `ancillary and auxiliary' in nature and adequate remuneration is paid to the Indian call centre, then there will be no tax on the foreign company that has outsourced such activity to India. "This policy is on the lines of OECD (Organisation for Economic Co-Operation and Development) norms and double taxation avoidance agreement," Mr Singh said.

The CBDT circular in January had stated that a "considerable portion of the profits" derived by foreign entities from outsourcing their core revenue generating business activities to India would be taxable under the Income-Tax Act if the Indian entity were to constitute a "permanent establishment" of the non-resident or foreign company in India.

"We are disappointed at this announcement in the Interim Budget," said Mr Kiran Karnik, President of National Association of Software and Service Companies (Nasscom).

Mr Karnik said he was hopeful that the Government would look into the issue. Nasscom is of the view that any move to tax foreign companies on their income earned from outsourcing would affect the flourishing BPO sector.

According to Mr Shantanu Rudra, Chief Financial Officer of Daksh eServices, a BPO company, clarity is required on segregation between core and non-core activities, which the Finance Minister's comments have not addressed.

"What the BPO industry was expecting was a policy statement from the Finance Minister that foreign companies outsourcing their services to India will not be taxed just as foreign companies outsourcing production of goods to India are not taxed," said Mr Vivek Mehra, Executive Director of PricewaterhouseCoopers.

Indian companies, which operate from STP/EOU/SEZ units and provide services or goods to clients outside the country, enjoy tax holiday benefits. So, it was ironical that the foreign companies who buy services from India were sought to be taxed in case they were sourcing non-auxiliary or non-ancillary services, Mr Mehra said.

MUMBAI: The tax break offered to foreign firms outsourcing services to India has been welcomed. This is expected to promote the growth of outsourcing to India and would prevent any barrier to outsourcing in the existing environment, according to Mr Shanmugam Nagarajan, Founder and Chief Operating Officer, 24/7 Customer.

However, he remarked that a service, irrespective of whether it is core or auxiliary or ancillary, should not be charged. "Moreover, there is no distinct definition of core versus auxiliary and it is not clear as to what type of services this applies to", he added.

HYDERABAD: Reacting to the Interim Budget provisions, Mr Shakti Sagar, Managing Director of ADP Wilco, and President of Hyderabad Software Exporters Association (Hysea), said that the Finance Minister, Mr Jaswant Singh, had put to rest the concerns expressed by the multinational corporations (MNCs) with regard to the Central Board of Direct Taxes' proposal to tax these companies in their BPO initiatives.

For instance, the captive units of these MNCs were liable to tax as per the proposal. This move would have been detrimental to the industry given the consolidation phase this sector was passing through. Any such move would have deterred the MNCs and their investments would have been hit.

The Minister's statement would have a positive impact on the sector leading to more investments.