Several multinationals planning to set up business process outsourcing units in India are reviewing their options because of a Budget proposal that seeks to tax them.

Some multinationals Business Standard spoke to said, the ambiguity on tax was squeezing growth by 50-60 per cent, with consequential employment and foreign exchange losses for India.

Outsoucing and India: Complete Coverage

Several thousand BPO jobs were in limbo and some overseas companies had actually preferred other countries to India to set up captive units, said multinational executives, who declined to be named.

When contacted Kiran Karnik, president, Nasscom, said: "Any move to tax the savings or earnings arising through outsourcing to Indian BPOs will certainly kill the distinct cost advantage they have over others. If such a move is taken forward, many jobs that would have come to India will move elsewhere."

This will impact companies like GE, Dell, American Express and Hewlett-Packard because the onus will be on them to prove their dealing with their associate BPO firms in India adhere to "arm's-length" pricing.

The uncertainty pertains to Section 9(1) of the Income-Tax Act, introduced in the Budget for 2003-04, in which the Central Board of Direct Taxes has held that while receiving calls per se does not constitute a taxable activity, selling products through tele-marketing does.

In a recent presentation to the Emerging Issues Task Force, set up by the CBDT to examine non-resident Indian taxation issues, the industry pointed out that the proposal had cost the BPO sector dear.

However, domestic infotech majors, which have substantial presence in infotech-enabled services, have told the task force that in cases where outsourcing was through an associate company and the remuneration was lower than the arm's-length price, the differential should be taxable.

A number of credit card, insurance, travel and other financial services companies based in the US and Europe use their India-based call centres to solicit business from customers across the world.

The industry said if Indian BPOs were perceived as being unattractive for doing tele-sales due to the tax ambiguity, the other BPO tele-servicing business would get adversely affected.

The sector is anxiously awaiting a notification from the finance ministry, which is expected to exempt multinationals with BPO subsidiaries in India from paying any tax.

This will, however, be subject to the multinationals maintaining an arm's-length pricing in transacting with its Indian subsidiary. Revenue department officials said the notification was expected next week.

A senior executive from a multinational financial services company echoed Karnik's warning. Such a move would give an opportunity to other countries competing with India, he said.

What has added to the confusion is a notice recently served by the Income-Tax department to a host of captive and dependent BPOs undertaking tele-sales to furnish details about their foreign principals.

The BPOs, however, told the department they were not obliged to provide such information as it was confidential and not related to their tax liability.

The BPOs have also stated that since the goods or products sold did not touch Indian shores, the overseas company should not be subject to tax.

A committee set up by the CBDT to examine the issue recommended that the arm's length pricing would provide subsidiaries of multinationals an escape route.

The BPOs, which are dependent entities but not subsidiaries, may also use the arm's-length principle to avoid being taxed here. Independent entities of course have no such problem as they are exempt under Section 10A, 10B of the Income-Tax Act.

Confusion

• Can MNC income generated by a BPO subsidiary through tele-marketing or tele-sales be subject to tax in India?

Impact

• Indian BPOs doing tele-sales may be unattractive and other tele-servicing business will be adversely affected
• Tele-servicing activities offer huge potential for Indian ITES/ BPOs
• Growth hampered by 50-60% loss in employment and foreign exchange too