Confusion Reigns Over India's Decision To Tax Outsourcing Business

by Lorys Charalambous, Tax-News.com, Cyprus

06 February 2004

Indian Finance Minster Jaswant Singh’s attempt to clarify the tax position of firms in the country’s booming outsourcing industry has been greeted with a mixed response, and appears merely to have added to the confusion surrounding the issue.

“It has been clarified that if outsourced services are ancillary and auxiliary in nature and adequate remuneration is paid to the Indian call centre, there shall be no tax on such foreign company as has outsourced its activity to India,” Singh explained whilst delivering his interim budget speech.

“This policy is on the lines of Organisation for Economic Co-operation and Development (OECD) norms and double-taxation avoidance agreements,” he added.

The controversy began when the Indian government notified firms last year that ‘BPOs’ (Business Process Outsourcing firms) would be liable for income tax on earnings which related to the parent company’s core business. The BPOs opposed the move, arguing that the services being provided were sold to foreign customers, and that therefore foreign firms should be liable for tax.

“The income tax department said that such Indian outfits will be regarded as permanent establishment under the double tax avoidance treaties and have to be taxed under Indian law,” the National Association of Software and Service Companies (NASSCOM) revealed, going on to warn that:

“Already three big companies have expressed their apprehension to NASSCOM. And, because the interpretation is left to assessing officers, NASSCOM fears litigation and worse.”

The BPO sector in India has undergone huge expansion in recent months, with some estimating growth rates in the region of 60%. By 2008, it is expected that the industry will be worth between $21 and $24 billion, according to figures quoted by the Business Standard.

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