Tax issue halts foreign firms' BPO march into India

Companies from the US & UK planning to outsource high-value jobs to India have been stopped in their tracks by the government's decision to tax foreign companies outsourcing jobs to India.

This is expected to limit companies bringing in high value jobs to the country, said Deloitte managing director Manish Soman.

Of the Rs 11,700 crore Indian BPO market, about 60 per cent is made up of captive BPOs set up in the country by foreign entities and includes players like AOL, Axa, Dell, Fidelity.

Some of these are likely to be affected by the tax implication. JP Morgan Chase is also rethinking about bringing in high value jobs to India, as is the case with a number of Deloitte's clients.

"If India puts up artificial barriers US companies will go to other parts of the world where there is no incidence of tax on outsourcing jobs to the country," said CRESA Partners chairman William W Goade, an international corporate real estate consultant. He's dealing with a host of US companies keen to set up operations in India.

According to a latest ICRA report on the BPO industry, the share of the captive segment "" that is foreign entities having set up their own operations in the country "" is as high as 60 per cent of the total industry size. These players including top names like AOL, Axa, Dell, Fidelity, are likely to be affected by the tax implication.

Companies are outsourcing easier and more repetitive processes to India today though they are looking at outsourcing high value added jobs. "The tax implication however, imposes a glass ceiling on how much you can grow," said Soman. Deloitte and a host of foreign companies have made representations to the government seeking greater clarity on the tax issue.

"We are doing more value-added jobs in ITES, and hence the issue of ancillary and non-core business becomes more confusing," said Deloitte's chief. The centre in the recent budget made a distinction between ancillary and auxiliary services of BPOs, accordingly to which tax would be imposed on foreign companies. However, the revenue department has yet to clarify what would be termed as critical and non-critical services.

Even as developed nations like the US and UK fear the loss of millions of jobs from their respective countries, the Indian government has put brakes on this employment opportunity.

BPOs ought to be treated in line with foreign companies outsourcing production and manufacturing of goods to India, where there is no tax element, said PricewaterhouseCoopers executive director Vivek Mehra.

The Indian government's decision to impose tax on foreign entities will affect a host of companies. HSBC professes that it will not be affected by the interpretation of the tax law since its global services sectors provide back office services, which it said do not account for core activities.

Other global financial companies like JP Morgan Chase is rethinking about bringing in high value jobs to India, said market sources. Some of Deloitte's global clients outsourcing processes to its facility in Mumbai have also decided to look at other countries. On their radar screen are countries like China and the Philippines where there is no incidence on taxing jobs outsourced to the respective countries.