Taxmen: The next big worry for Indian BPOs

DQW Bureau
New Update


Pink Elephant campaigns, attrition, telecom infrastructure, soft skills,

training and development; Indian BPOs can add one more concern in their kitty

– the Indian taxman. Post Indian Prime Minister fighting out the backlash

issue, the home ground might have something inclement in store for this sunshine

industry, which is entitled to tax holidays under section 10A and 10B of the

Income Tax Act.

First, Cen-tral Board of Direct Taxes (CBDT) mi-ght like to impose a tax on

the roya-lty from imp-orted soft-ware as a withholding tax in the co-ming

bud-get. The sec-ond concern is about the amendment of the term ‘business

connection’ under the Indian Income Tax Act of 1961. According to section 9 of

the Income Tax Act, a non-resident having a business connection in India is

taxed only in respect of income attributable to the Indian operations. The

Finance Act, 2003 added an explanation to section 9 of the Income Tax Act,

laying out situations under which an Indian agent would constitute a business

connection of such non-resident entity in India.

This amendment might bring some worry lines for the BPOs, especially the

captive units such as GE, Amex and HSBC, that will be deemed to have their

business connection in India. However, it will only be clear once the task force

gives its recommendation. The task force is examining whether a non-resident

company, which has outsourcing deals with a BPO outfit in India, is subject to

tax in India.


The Indian BPO industry is yet to get a clear picture on the fact that when

the foreign client of the Indian BPO company who concludes a contract through

the call center, is liable to tax in India. Indian BPO is still oblivious on the

tax structure prevailing in the world of other competitive markets.

Coming back to the taxes on the royalty on certain imported software, it

might affect BPOs that are using proprietary software imported from their parent

companies abroad. So far, no such tax has been levied on the clients of BPO

firms. Once implemented, the tax department will consider such imports as final

services rendered and impose a withholding tax on it, in line with the tax

treatment of purchases of copyrighted products like recordings, designs,

patents, etc.

The third point of con-cern is the rise of the transfer pri-cing for the BPO

work, which is also creating some ripples in the tax-man’s office. The

Intra-firm con-tracts, which are between the parent companies overseas and their

Indian subsidiaries, will be covered under this policy. The taxation authorities

in some cases are skeptical about the lower unit prices that are being given to

these subsidiaries than similar contracts with other non-parent BPO firms.


Which means that the parent company is retaining more profits overseas and

limiting the money given to the Indian company, that reduces its profits and

therefore the tax paid in India.

Arm’s-length pricing will stand true for captive units and not for Indian

or third party BPOs. This practice is being used in various countries for

various products and is not an alien term for few BPOs.

So far Indian government has been supporting the BPOs by giving tax holidays

and various tax exemptions. But these new tax issues might put some brake in

this fast growing industry that is quintessential for the rising Indian economy.

This might also have a negative impact on the Indian edge–best costs with

quality workforce. All might be settled once the task force submits its


Shweta Khanna

(CyberMedia News Service)