Incidental BPO Services Exempted From Tax Net

New Delhi, Jan 2: | Updated: Jan 3 2004, 05:30am hrs
The government has said there will be no income tax on BPO firms providing only incidental services through call centres to companies abroad, while those offering core services, including software maintenance and development, will be taxed.

BPO units offering incidental services do not generate income separately and that it is difficult to determine the profits generated by the domestic BPOs to the foreign company, which has outsourced the services, the Central Board of Direct Taxes said here on Friday, reasoning for the tax exemption.

Moreover, the services rendered by such BPOs resulted in an insignificant profit to the principal company abroad, the the CBDT noted. The government, however, has put up a pre-condition that charges paid by foreign companies to Indian call centres should be at arms length/fair market price.

The decision to exempt tax, which would help many call centres catering to IT, banking and insurance sectors, comes in the wake of apprehensions over a certain section of the Income Tax Act which laid out that profits of the foreign companies attributable to business activities in India become taxable. However, in the case of BPO entities undertaking core activities as software development and maintenance, debt collection service, investment consultancy and travel agent services for the principal foreign companies, such firms will have to pay income tax, the CBDT said, adding such services rendered either directly to the customers abroad or through non-resident principal would be taxed since a considerable portion of profits derived by beneficiaries would be attributable to the activities of BPO firms in the country, CBDT added.