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A disservice to BPOs

K. Vaitheeswaran

K. Vaitheeswaran on the negative impact of service tax on business process outsourcing activities.

BUSINESS process outsourcing (BPO) is turning out to be a second honeymoon for the Indian information technology (IT) sector.

The opportunities are vast and the outsourcing segments are increasing by the day. Process outsourcing takes within its fold various elements such as finance and accounting, customer relationship management, human resources, business process, transcription, supply chain management, and so on.

Business auxiliary services are subject to service tax at the rate of 8 per cent w.e.f. July 1, 2003.

Business auxiliary services

The provisions indicate that the following services, which constitute business auxiliary services, are taxable:

  • Promotion, marketing or sale of goods produced or provided by or belonging to the client (commission agents have been exempted);

  • Promotion or marketing of service provided by the client;

  • Any customer-care service provided on behalf of the client; and

  • Any incidental or auxiliary support service, such as billing, collection or recovery of cheques, accounts and remittance, evaluation of prospective customer and public-relations service.

    Section 65(19)(iv), while defining incidental or auxiliary services, uses the words "such as". The Supreme Court, in Royal Hatcheries Pvt. Ltd vs State of Andhra Pradesh (1994 92 STC 239), has held that the words "such as" means that it is only illustrative and not exhaustive.

    IT service

    The definition of business auxiliary service, as per Section 65(19) of the Finance Act, 1994 and amended by Finance Act, 2003, specifically excludes any "information technology service".

    IT service, as per the provisions, means any service in relation to designing, developing, or maintaining of computer software or computerised data processing or system networking or any other service primarily in relation to operation of computer systems.

    In terms of interpretation of statutes, the word "means" has a restrictive and exhaustive meaning.

    Therefore, unless a business falls under any of the categories referred to in the definition, it would not be possible to classify the service as IT service.

    A BPO which satisfies this definition of IT service would not be liable to service tax. The Government, vide Circular dated June 20, 2003, has clarified that only if the output service provided by a service provider is in the nature of IT service, the exclusion would apply.

    The mere fact that the personal computer or a laptop has been used for providing the service would not make the service an IT service.

    It has been further clarified that the fact that IT services are used by the service-provider as an input service would not automatically make the output service an IT service.

    The circular attempts to generalise the issue by excluding activities based on a personal computer or laptop. Certain BPO activities necessarily involve receipt of data through files, processing of such data, review as per specifications, creation of new data files and onward despatch of the new files to the clients.

    Where the activities carried out by a BPO unit falls within the definition of IT service as set out in the explanation to Section 65(19), there is no liability. The term `computerised data-processing' is quite wide in its scope and would cover a number of IT-enabled services.

    Exports

    India is a chosen destination for BPO activities and a number of companies are catering to the outsourcing requirements of overseas customers. Export of goods enjoys significant tax benefits under the current tax laws. There is no sales tax on exports. Central Excise rules read with relevant notifications provide for rebate of excise duties paid on exports or permit export without payment of duty.

    Originally, there was specific notification No. 6/99 of May 9, 1999, which granted exemption in respect of payments received in India in convertible foreign exchange from the whole of service tax.

    The said notification was rescinded by Notification No. 2/2003-ST of March 1, 2003, thereby withdrawing the exemption from service tax for payments received in convertible foreign exchange.

    However, the Central Government has, by ST Circular No. 56/5/2003 (in F. No. 254/1/2003 CX-4) of April 25, 2003, has clarified that "service tax is a destination-based consumption tax and it is not applicable on export of services.

    Export of services would continue to remain tax-free even after the withdrawal of Notification 6/99 dated April 9, 1999. Secondary services, which are consumed or merged, with the services that are being exported are also not liable to service tax."

    This circular raises three interesting issues.

    First, the legislative intent of not taxing export of services has been clearly communicated through the circular.

    Second, even secondary services which are consumed or merged with the exported services are considered not liable to tax. Third, if the secondary service gets consumed in part or toto for providing service in India, service tax would be leviable on the secondary service-provider.

    It would be appropriate for the Government to issue an exemption notification in respect of secondary services to make the law abundantly clear. Any circular issued by the Board is binding on the Department, as laid down by the Supreme Court in a number of judgments. Thus, any service-provider who falls within the ambit of business auxiliary service will not be liable if he: a) is an exporter of such services, or b) provides such service to a primary service provider who is an exporter of such services.

    Medical transcription

    The Central Government has issued Notification No. 8/2003 dated June 20, 2003, in terms of which taxable services provided by `a medical transcription centre' have been exempted from service tax.

    Medical transcription centre, as per the notification, means a commercial concern which transcribes medical history, treatment, medical observations and the like.

    Medical transcription is basically done for overseas customers and would in any event qualify as export of services. However, by virtue of this exemption notification, all medical transcription units providing such services to any customer would not be liable to service tax.

    Call centres

    The Central Government, vide Notification No. 8/2003 of June 20, 2003, has exempted taxable services provided by a call centre.

    As per the notification, call centre means a commercial concern which provides assistance, help or information through telephone on behalf of another person. This exemption notification is welcome, as there is an increased level of activity in the field of customer care, 24-hour helpline services, customer support services, and so on.

    Therefore, if any unit provides assistance, help or information on behalf of another person through telephone, the unit would qualify as a call centre. An interesting issue would arise when the same service is provided through the Net or Web sites.

    General transcription

    Transcription services would include medical transcription, legal, general transcription, verbatim transcription of forms, interviews, discussions, investigation matters, documentation services, including documents production, scanning services, coding, electronic data discovery, and so on. Though the Government, by Notification No. 8/2003 of June 20, 2003, has exempted the medical transcription from the service tax net, nothing has been mentioned in regard to the general transcription. In view of this, the same can be treated as falling under business auxiliary services.

    The circular, while explaining the scope of business auxiliary services, provides that it is not possible to give an exhaustive list of such services and has given illustrations of services such as evaluation of prospective customers, processing of purchase orders, customer management, information and tracking of delivery schedules, accounting and processing of transaction, operational assistance for marketing, formulation of customer service and pricing policies, managing distribution and logistics.

    The circular seeks to give a wide meaning to business auxiliary services. However, export of services will not be taxable, as it is not liable to service tax as clarified by the Government vide circular dated April 25, 2003.

    The fundamental object of business outsourcing is to avoid or reduce the investments in employees and infrastructure. The BPO industry is slowly growing and is facing challenges such as competition from China, protectionism through law by the US, and so on.

    Further, the new services, such as training, maintenance, commissioning or installation, franchise, business auxiliary services, technical inspection, forex broking, and Internet cafés are expected to generate together Rs 400 crore for the year ending 2004. In such circumstances, it would be appropriate to dispense with this levy.

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