A recent CBDT circular made taxation of BPOs an intensely debated topic in India. The authors explain the taxation aspects as well as how implications of taxability will deter outsourcing of business operations to India.

Whatever rules and regulations that the Government wants to introduce has to be clear to the practitioners. In the circular there is no clarity on what is core and what is non-core. It is still confusing. This is not the right way to create a rule. I have no doubt that the officer concerned will take immediate action to correct the situation.

The year of Offshore outsourcing, is how many refer to 2003, the year when Multinationals flocked to India, and the Business Process Outsourcing (BPO) wave swelled into new verticals and new services. According to Gartner Inc., a leading provider of research and analysis on the global information technology industry, the Offshore BPO stood at $1.3 bn and is expected to grow by 65% in 2004, an estimate of $3.00 bn. Despite the tough market scenario, Indian BPO industry generated a revenue of Rs.11,300cr in 2002-03, reports National Association of Software and Service Companies (Nasscom). According to Nasscom, the Indian BPO segment presently accounts for 2% of the global market and is estimated to grow to 4.8% by 2008. Skilled manpower, low labor costs, advantageous time zone location, and tax incentives are a few factors that contribute to this tremendous growth. The role of Indian Government in achieving this stature is notable. Significant investment in infrastructure, liberalization of Telecom sector, and creation of a regulatory environment which is conducive for BPOs to thrive have been significant milestones in this direction. If BPOs are doing well in India, then what is this sudden heated debate on BPO? The `confusion' over the tax status of BPOs, created by the CBDT circular issued on January 2, 2004 is `the concern'. However, the roots to this problem can be traced to Section 9(1) of the Income Tax (IT) Act introduced in Budget 2003.

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