A flood of outsourcing contracts -- especially from banks and insurers -- is likely to come India's way from the United Kingdom, reveals the pre-budget report presented on Thursday by UK Chancellor Gordon Brown.
The report proposes to clamp down on a method of avoiding paying value added tax, said The Guardian.
Companies are thus likely to shun British outsourcing businesses and choose foreign firms -- especially those in India and other low-cost Asian destinations -- to provide services such as call centres and back-office processing, if proposals to close a tax loophole are introduced, The Guardian said.
India, feel experts, might benefit the most from Brown's proposal when it is implemented.
"Companies who outsource their services are exploiting VAT regulations on grouping to avoid paying the tax. Customs & Excise has been trying to stop the practice, but the government is poised to start consulting industry about legislation to make it tougher to avoid VAT through this route," said The Guardian.
"India is attractive for other reasons apart from VAT, such as the lower labour costs. But it is another reason for banks and insurers to look offshore when they are considering outsourcing," the Financial Times quoted Kendra Hann, head of London VAT at Deloitte, as saying.
This will drive more companies to India because outsourcing to another country does not incur VAT. The measure takes away the loophole that was there for companies to mitigate VAT costs on outsourcing, said FT.
"It may drive the move to India and other cheaper countries further, if the UK outsourcing sector has to charge VAT. Or they may choose not to outsource at all," Hann was quoted as saying.
The pre-budget report said that 15.7% of VAT revenues due did not come in last year. However the VAT receipts this year are £2bn ahead of forecasts, leading the government to hail the VAT strategy a success.
It will add a further 450 staff to the VAT compliance department over the next two years to target those who routinely avoid tax and to chase tax owed to the Treasury coffers.
Hann said the change could affect outsourcing companies including recruitment agencies, IT companies and logistic and support services firms, reported FT.
A spokesman for the Treasury rebutted the argument, said FT. "The government has looked carefully at least twice at the issue, and could find no evidence that VAT is a critical factor in outsourcing decisions," he said. "When we take action to stop blatant VAT avoidance, we do not expect this to affect the market for outsourcing," the FT quoted him as saying.
On top of the extra tax income from clamping down on VAT, the government is raising extra revenues through increasing tax on trusts used by high income individuals, tackling avoidance of duty on spirits and targeting the construction industry, FT said.
It will use the additional revenue to pay for increasing the child tax credit and other measures, the newspaper added.