Outsourcing tax keeping MNCs away

The recent move by the government to tax multinational companies' earnings from outsourcing core business process activities to India has resulted in at least three major companies deferring their investment plans, according to Kiran Karnik, president of the National Association of Software and Service Companies (Nasscom).

The Centre has recently issued a notification that provides for taxing the savings earned by multinational companies by outsourcing core business processes to their captive call centres based in India.

However, the government has exempted the non-core activities and taxed only the core activities. Core activities, by definition, are the high-value activities.

Karnik said such a move could drive the business process outsourcing (BPO) investments away from India to other tax friendly countries.

"Captive BPO businesses would be affected. There is a strong possibility that they would move to countries like China and the Philippines, which have more tax friendly environments," Karnik said.

"It is not a good move and has come at a wrong time. This is the time to boost the sector not to tax it", Karnik said .

Karnik echoed the sentiments expressed by European Union trade commissioner Pascal Lamy yesterday in asking India to open its services.

"Recognise the advantages of opening up. The opportunities are huge", he said referring to the accounting and legal professionals who have opposed India's opening up its services.

Pointing out that opening up of services was beneficial to everyone, Karnik said the only difference could be on how to go about the process.

"In the software sector, few years ago, many thought that competition will eat us up. We not only proved them wrong but also proved that opening up was a good move," Karnik said.

"By opening up the services, opportunities will increase many fold. There are of course issue and problems. But the overall picture is clear", he said.

Karnik added that if India opened up the accounting sector, Indian accountants would get attractive jobs, employment opportunities would increase, and like the Indian information technology professionals, opportunities for accountants to work inside and outside the country will be immense.

The European Union had expressed its disappointment on India's offers on trade in services saying it failed to redress the current low level of Indian GATS commitments, and in some areas, doesn't even reflect the current level of openness in the Indian market.