The Indian Central Board of Direct Taxes (CBDT) released a final circular late last month clarifying the tax position of foreign business process outsourcing (BPO) operations in the country.
The Board's communication explained that BPO units will be taxed according to India's transfer-pricing rules, and in line with the country's network of tax treaties.
Under the terms of the BPO rules as they now stand, operations outsourced to India by foreign firms (such as call centres, credit card processing, and other back office operations) will only be subject to tax if they are a permanent establishment of the overseas company. In such cases, the arms-length principle of transfer pricing will come into play when calculating the levels of tax to be paid.
The latest communication is designed to put an end to the confusion created at the beginning of this year, when the Finance Ministry issued a circular stating that tax would be levied on multinational firms operating permanent BPO operations in India if the services provided related to the firm’s core business.
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