BPOs Lose Biz, Warn FinMin On Tax Confusion

New Delhi, Aug 29: | Updated: Aug 30 2003, 05:30am hrs
As if poor back up in power, transport and bandwidth wasnt enough of a headache, Indias BPO (business process outsourcing) players have complained that continued fuzziness over the interpretation of applicable income tax law is driving clients away.

The countrys $2-billion (Y2002 revenue figures) BPO industry has told government of the nervousness among international outsourcers over what the Indian taxman may decide on the liability of the foreign service recipient. The high stakes are obvious enough. If Indian BPO centres are treated as a permanent establishment (PE) of the foreign service recipient, the international client is liable to be taxed on incomes generated out of these (BPO) operations at the rate of 41 per cent. This may well be passed on to the Indian BPO. The fear is that some taxmen may even attempt to invent ways to compute incomes that are generated from whats essentially an auxiliary voice or data hook up that the Indian operator is providing, when both the producer and the end-customer are sitting outside India: the Indian BPO typically having no authority to secure/conclude contracts.

Sources said BPO players have represented to the government specific cases where irritated clients have opted to outsource jobs to Mexico, China, and the Philippines instead. This after Indian BPOs failed to provide them with a satisfactory clarification on section 9 (1)(i) of the Income Tax Act on its new definition of business connection.

It isnt as if the government were out to kill the BPO sector. Experts say the problem is that bureaucrats need to keep pace with the nuances of international taxation and e-transactions (see process flowchart on Page 8). The finance ministrys assurance so far is that the net has been cast only for tax income attributable to below mentioned operations of agents who act on behalf of non-residents and have a business connection:

* agents who have the authority to conclude contracts

* those who maintain stocks of goods from which regular deliveries are made

* and those who habitually secure orders in India wholly or almost wholly

But potential clients counter that they have clearer policy regimes to choose from. Added costs of taxation on notional income in India is just one of their fears. Outsourcers apprehend added paperwork on compliance requirements (filing of return of income, assessment proceedings). Plus, there is apprehension of litigation in a jurisdiction where practically no economic activity is being undertaken.

Experts say Indias BPO industry is equally to blame. They say it is hardly equipped to have its voice heard in a $773-billion (IDC Research) global BPO game. Even though there is a projected global CAGR of 9 per cent, CAGR here is expected to be 54 per cent over the next four years, and the global pie is expected to touch $1 trillion by 2006, desi BPO players havent been able to get NASSCOM to crack the whip on their behalf often enough.

Sensing an opportunity, the usually slow moving Assocham is trying to put together a BPO Foundation of India representing stakeholders in BPO/IT enabled services. Sources said the steering committee under Umang Das and TR Dua now includes Joseph Alexander of Tata Services, Bhaskar Bagchi of Daksh, Sumit Bhattacharya of BPO Services Ltd, Amit Chugh of Sanskriti Engineering, Sanjay Kapoor of TeleTech, Deepak Maheshwari of Satyam Infoway, Rajendra Prabhu of Convergence Plus, Raman Roy of Wipro Spectramind, Kapil Dev Singh of IDC, Hanumant Talwar of GE Caps, and Vikram Talwar of EXL Services. Leading Indian BPOs include eFunds, Bhilwara Info, 24/7 Customer Access, Transworks, ITI, and Indigo Lever.