Killing BPO Softly

Updated: Jul 30 2004, 03:20am hrs
Union finance minister, P Chidambarams decision to do away with the distinction between core and non-core activities performed by the BPO unit of a foreign company takes care of one problem.

But leaves another that could, over time, prove just as vexatious. Thus, doing away with the artificial distinction will bring Indian tax practices in line with global norms.

Better still, it will do away with the discretion allowed to the income tax official under the old system to decide what is core and what is non-core.

That is no small gain when you have a tax administration that is not known for its probity.

However, in saying that tax will be attributed to the foreign company wherever the dependent BPO outfit in India is found to have violated transfer pricing principles, the government may have opened up a huge can of worms.

The reason is that transfer pricing the practice of MNCs pricing goods at lower than market value in order to shift profits into lower-tax jurisdictions is a minefield.

In a situation where the market price or arms length price is hard to define, how does one tax the difference between the actual and the market price

Today, some of the best accounting and legal brains are locked in battle with revenue authorities over the complexities of transfer pricing.

In the UK, for instance, tax returns of UK subsidiaries of Nissan and Honda are currently under investigation for under-booking of profits using transfer pricing jugglery.

The charge is that both companies have deliberately booked losses in the UK where tax rates are much higher than in, say, Ireland in order to minimise their tax outgo.

One can argue that transfer pricing is as much an issue in manufacturing as in the BPO sector and hence there is no need to treat BPO differently.

But there is a crucial difference.

The BPO sector is a sunrise sector where India has demonstrated its competitive advantage. Moreover, it is an area that could possibly provide employment to a wide cross-section of our population.

Today, low-end jobs like call centres are the public face of BPO. But as we move up the value chain, we could offer services like design, medical diagnosis, accountancy, legal services... the sky is the limit.

The BPO sector has been growing at an astounding annual rate of around 50 per cent over the past few years. Given its huge externalities, it would be foolish to jeopardise this growth in the hope of some additional tax revenue that may or may not materialise. The FM must accord a lighter touch to this sector.