BPOs can relax! No tax on services

BPO s can relax. Finance minister P Chidambaram has been advised to withdraw the circular proposing to tax something never heard of before: core services that are outsourced to India.

While international treaties and practices have clear concepts such as arms-length prices, the CBDT appears to have invented a new concept called core services.

This gives the income tax department the authority to decide, on a case to case basis, what portion of the parent company’s profits can be attributed to Indian BPO operations and taxed. Nasscom has protested that this is contrary to international practices, and is not followed by BPO rivals like Sri Lanka or the Philippines.

Nasscom views the circular as an harassment and uncertainty. If implemented, it will drive many BPO operations away from India. Nasscom says India needs a tax regime that encourages foreigners to start BPO operations here, not frighten them away.

The government’s proposed move to withdraw the tax on core services is a vindication of ET’s stand, through its editorials and comments.

Although it is four months since the circular was issued, no BPO operation has left India.

Foreigners seem to believe that the new finance minister, whoever he might be, would see the sense of their position. They are sure that Mr Chidambaram, as a lawyer, will see their point.

Senior government officials have briefed the finance minister to the effect that the concept of core services would not stand up in the courts.

They point out that there is no concept called core services in the domestic law or international treaty laws.

To get a fix on taxation of foreign companies that outsource work here, the CBDT circular on tax treatment of BPOs has distinguished between core revenue generating services and incidental services that generate negligible revenues in India.

The BPO industry has been up in arms, saying these distinctions have no standing in international tax practice. They have asked the government to withdraw the circular.

Before the new government formally took charge, revenue secretary Vineeta Rai said that the CBDT would issue a clarification. Finance minister was briefed on the issue by top government officials.

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