Come March and the budget bells start ringing for the Finance Ministry, which is still taking its time especially on the BPO taxation issue. The Business Process Outsourcing (BPO) Industry has asked the ministry to specify that profits of foreign companies outsourcing work to India arms should not be factored in to calculate the tax dues on the BPOs.
Giving further details, Sources in the industry pointed out that the CBDT circular on the subject, issued in September last year, only partly clarifies the issue. The circular says that – If a foreign company has a business connection with a local entity, this resident entity would be treated as a permanent establishment (PE).
Giving further details, Sources in the industry pointed out that the CBDT circular on the subject, issued in September last year, only partly clarifies the issue. The circular says that – If a foreign company has a business connection with a local entity, this resident entity would be treated as a permanent establishment (PE).
An Indian outfit would be a PE for a foreign firm if it habitually exercised authority to conclude contracts and delivered goods or merchandise regularly on behalf of the non-resident principal. This means that the income attributable to a BPO unit – only if it constituted a permanent establishment – would be evaluated on the basis of arm's length principle. However, the non-resident outsourcing IT-enabled BPO work to India is still obliged to file a tax return and be assessed for taxation in India.
The BPO Industry wants it explicitly stated that the non-resident outsourcing work to India would not be liable to tax in India for such work and hence would not be required to file any return of income in India. The industry says this is necessary to "boost the business prospects of the BPO industry" Instead, it has demanded that the arm's length pricing principle be calculated only on the basis on the activities carried out by the IT-enabled BPO units in India.
Nasscom president, Kiran Karnik said, "The Income Tax Act has to be amended to remove the concerns of the non-residents and to protect the interest of revenue." According to him, if there is any shortfall in the "arm's length price", a consequential adjustment towards the shortfall should be made only in the hands of the BPO unit.
Priyanka. S
