Industry confused over new BPO taxes

NEW DELHI: The Central Board of Direct Taxes (CBDT) recently came up with a draft, revised circular on taxation of IT-enabled business process outsourcing (BPO) units in India. The revised circular provides that the profits attributable to the Indian entity constituting the PE of the non-resident entity would be determined on the basis of "arm's length principle".

While Nasscom was quick to welcome the BPO taxation move by the ministry of finance, the industry is again in a state of confusion over terms like 'permanent establishment' (PE).

Welcoming the new draft circular, a Nasscom release said that it was it was in line with its stance of following an "arm's length principle for captive ITeS/BPO units in India.

"With this draft circular, we understand that if the Indian entity is liable to be taxed at an arm's length for the activities performed by it, no further income would be deemed to accrue or arise to the foreign principle, irrespective of the nature of activities-incidental or core-performed in India," the release stated.

Legal experts on the other hand have a different view. According to Pawan Duggal, a legal expert in the BPO arena, any type of taxation in this sector will create roadblocks for potential as well as current BPO establishments.

"At present, India is riding high on a BPO wave. But we should not forget that small countries like Philippines or Vietnam and even Malaysia could provide a competitive infrastructure case, in front of potential BPO players. In order to maintain our cost advantage, Indian government should relax its taxation policy towards BPO and ITES," he added.

Patni Computer Systems BPO head, Sanjeev Kapoor said that there is a lot of confusion as the circular has not defined the term PE. "Terms like PE and arms length principle needs to be further elaborated upon. So overall the circular is quite confusing and I sincerely hope that the government will come forward in removing the confusion associated with these terms," he added.

Echoing a similar note, president-India and head of global operations at vCustomer Sujit Baksi said that there is a judgmental issue involved with this circular. "Terms like the PE are not well defined in the circular. So it will again depend on the judgment of a particular individual to interpret it," he opined.