Decision on BPO tax next week

Units may get waiver if they can prove arms-length pricing.

Finance Minister P Chidambaram is expected to decide by next week the taxation regime for Business Process Outsourcing (BPO) units.

Top finance ministry officials said " Nasscom has already made a very convincing case to the ministry, to keep the sector out of taxation net".

They also said the ministry may give a tax waiver if the BPOs are able to prove that they have maintained an arm's length pricing relationship with the foreign companies.

The officials said the minister has decided to settle the issue as soon as he is through with the immediate pressures of Budget making. They said the Central Board of Direct Taxes would soon put up the matter before the minister to take a decision.

"Some announcement from the ministry may come through in next week", they said. Currently foreign companies which have a BPO unit in the country are expected to pay tax on their income, provided they satisfy two conditions.

It has to be proved, that the latter are a permanent establishment of the former, and there has been some value added work done by the BPO for the foreign company, which has added to the income of the company. The officials said the government has already exempted from tax net, order booking by the BPOs on behalf of their foreign principals.

There is also no tax liability if the foreign companies have no one to one relationship with the domestic BPO. This was stated in a circular issued by the direct tax department in January this year.

The officials however did not say, whether a unit unable to satisfy the criterion of arms length pricing, would be subject to a presumptive tax.

A standing committee on emerging taxation issues, set up by the department has already suggested keeping the entire income of the BPOs from outside the purview of the income tax net.

Taxing days ahead

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• Nasscom has already made a very convincing case to the ministry, to keep the sector out of the taxation net

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• FM may give a tax waiver if the BPOs are able to prove that they have maintained an arm's length in pricing with the foreign companies

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• The CBDT will shortly put up the matter before the FM

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• Currently foreign companies which have a BPO unit in the country are expected to pay tax on their income, provided they satisfy conditions