BPO tax norms to be revised

Regulations on foreign BPO firms to conform with international laws

The finance ministry is reviewing its directive on the taxation of foreign business process outsourcing (BPO) units, and is working out a solution in accordance with the established principles of international taxation.

Inaugurating a two-day international tax conference organised by the Associated Chambers of Commerce and Industry of India (Assocham), Revenue Secretary Vineeta Rai said the directive issued in January this year sought to provide tax exemptions in certain situations where, according to the principles of international taxation, the foreign companies became taxable on small and insignificant incomes in India.

The government had sought to grant exemption on incomes earned from non-core activities. It also intended to tackle the apprehensions of foreign companies regarding their taxability of non-core activities.

Rai, however, said the ministry had understood that the complexities in the sector were much more intricate. The concerns were being considered and a viable solution, in accordance with the established principles of international taxation would, no doubt emerge, she said.

When contacted, senior CBDT officials confirmed that the board was studying the entire issue and a clarification would be issued soon.

The CBDT circular of January 2 had stated that when a non-resident or foreign company outsourced the whole or part of its core revenue generating business activities to an IT-enabled entity in India, such as the services of a travel agent, software developer and investment consultant, a considerable portion of the profits derived by the non-resident or foreign company from its customers abroad were attributable to the activities of the entity in India.

And, if the entity constituted a permanent establishment, such profits would be taxable in accordance with the provisions of the relevant tax treaty.

Responding to Assocham President M K Sanghi's suggestion, Rai said to avoid any double taxation in the home country, companies should insist on claiming exemption on the income taxed at source or claim credit for the tax so paid, in their home country.

This was the basic principle of any Double Taxation Avoidance Agreement whether based on Organisation for Economic Cooperation and Development (OECD) or UN Model.

The government, therefore, pursued the signing of the Double Taxation Avoidance Agreements with economic partners so that trade with these countries was not hampered on account of dual-taxation.

It is further committed to entering into equitable Double Taxation Avoidance Agreements with new countries as well. The negotiations were at an advanced stage in respect of many countries, she said.

Sanghi said some of the tax provisions in many of the areas had not only widened the scope of taxation, but also put additional responsibility of maintenance of records and tax compliance on a large number of taxpayers engaged in international trade. Hence, the concerns needed to be addressed urgently.