The Hindu Business Line : CBDT may revise circular on taxation of BPO activities

THE Finance Ministry has indicated that the tax department's circular issued in January this year on taxation of foreign entities outsourcing certain activities to the country may be revised.

This has bolstered sentiment in the business process outsourcing (BPO) industry. "The concerns of this industry (BPO) are being considered and a viable solution in accordance with the established principles of international taxation would no doubt emerge," Ms Vineeta Rai, Revenue Secretary, said in her inaugural address at a conference on international tax organised by the Associated Chambers of Commerce and Industry of India (Assocham).

She highlighted that the Revenue Department had recently been given to understand that the complexities involved in this sector (BPO sector) are much more intricate and that the circular is inadequate to deal with the problems of taxation arising in that area.

Ms Rai told Business Line that the Central Board of Direct Taxes (CBDT) has been directed to review the circular in the light of the representations received from the industry.

"The board will take appropriate decisions after considering the representation and factoring in the recommendations made by the Emerging Issues Task Force," she said.

The CBDT had, in its January 2004 circular, declared that a "considerable portion of the profits" derived by foreign entities from outsourcing of their core revenue generating business activities to India would be taxable under the Income Tax Act if the Indian entity were to constitute a "permanent establishment (PE)" of the non-resident or foreign company in India.

In cases where a non-resident company outsources the "incidental activities" to an IT enabled entity in India, which constitutes PE of the non-resident principal, the department had held that the "insignificant profits"

from "incidental activities" can be considered as embedded in the income of the PE taxable in India, if the price charged by PE is an arm's length/fair market price. In such a situation, the circular held that no income would separately accrue or arise to the non-resident principal in India.

After the circular was issued, many tax experts held that disputes could always arise on what is incidental and what are core activities. Nasscom too had made a representation to the Finance Ministry on the issue of taxation of BPO units.

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