The Hindu Business Line : Public debate likely on taxation of BPO units

THE Finance Ministry may seek the views of various stakeholders including industry before coming to a final decision on the taxation of BPO units in the country.

Indications are that the Revenue Department may soon put up a draft version of a circular for public debate.

The Finance Ministry had already hinted that the Tax Department's circular issued in January this year on taxation of foreign entities outsourcing certain activities to the country would be revised.

Sources said that the draft circular might do away the existing practice of distinguishing between "core" and "incidental" activities, which has been opposed by a large section of the BPO industry and certain tax experts.

They held that such an approach can lead to disputes on what would constitute as "core" and what would be considered as "incidental" activities.

In its January 2004 circular, the Central Board of Direct Taxes (CBDT) had declared that a "considerable portion of the profits" derived by foreign entities from outsourcing of 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 (PE)" of the non-resident or foreign company in India.

In cases of non-resident companies outsourcing the "incidental activities" to an IT-enabled entity in India, which constitutes PE of the non-resident principal, the department had held that the "insignificant profits" from "incidental activities" can be considered as embedded in the income of the PE taxable in India, if the price charged by PE is an arm's length/fair market price.

In such a situation, the circular held, no income would separately accrue or arise to the non-resident principal in India.

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