MNCs With Indian BPOs To Fall Under Tax Net

New Delhi, Sept 28 | Updated: Sep 29 2004, 05:30am hrs
The vexed issue of BPO (business process outsourcing) taxation seems to be far from over. In a circular issued on Tuesday, the Central Board of Direct Taxes (CBDT) has done away with the distinction between core and incidental activities, but has held that foreign companies will be taxed in India if the BPO unit here constituted its permanent establishment (PE).

The foreign company will, however, not be required to pay any tax if the profits generated by the Indian BPO unit (constituting its PE) conformed to the arms length principle. This means that the PEs profits should be the same, be it in its dealing with the head office or with an entirely separate company, under conditions and prices prevailing in ordinary market.

Chartered accountant and tax expert Mukesh Butani told FE that the new circular was different from the earlier one in just one aspect. The old circular pre-supposes that if a foreign company has a business connection in India, it will be deemed as a permanent establishment, he said.

The circular issued on Tuesday, however, links the PE concept to the Double Taxation Avoidance Agreements which India has signed with various countries.

PE is defined only in the DTAA. So, a mere business connection of the foreign entity with an Indian BPO unit cannot mean that the latter is its PE in India, Mr Butani said.

Quoting the DTAA, the circular said that profits of the foreign company attributable to the business activities carried out in India by its PE become taxable in India under Article 7 of the agreement. A foreign company is treated as having a PE if it carries on business in India through a branch, sales office, or through an agent.

The new circular also rules out taxing a foreign firm if it does not have any business connection with the BPO unit here. In this case, the Indian BPO outfit will be assessed for income tax as a separate entity.