The finance ministry has decided to exempt multinationals with business process outsourcing subsidiaries in India from paying tax.

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The ministry is expected to issue a notification this week saying foreign firms whose call centres in India only take orders for buying and selling goods and services, will not have to pay tax for such operations.

The impact

Big relief for companies like GE, Dell, American Express and Hewlett-Packard BPOs for insurance, credit cards, pension funds services out of tax net The ambiguity on tax was squeezing growth by 50-60 per cent Several thousand BPO jobs were in limbo

The Central Board of Direct Taxes had appointed a task force on non-resident taxation to clear the uncertainty over Section 9 (1) of the Income Tax Act, introduced in the Budget for 2003-04, which held that while receiving calls per se was not taxable, selling products through tele-marketing was.

The board has now clarified that call centres are only providing services that are incidental functions, while the core activity of manufacturing and supplying goods and services are done abroad. Under such circumstances, profits from the BPO operations of multinationals will be insignificant and difficult to determine.

The only rider is that the transaction between the two parties should be at arms' length.

Finance ministry officials, however, said BPOs or call centres of MNCs engaged in providing "core services" would come into the tax net. The tax levied will be to the extent to which the profits of these non-resident companies are attributable to their Indian operations.

Core services have been defined as those, which have substantial revenue implications for the parent company.

It has cited the example of call centres, which provide software support services over the telephone, or engage in annual maintenance contracts for offshore customers. Travel-related services will also fall under this category.