The $600-billion global business process outsourcing industry is saving as much as 75-80 per cent by setting up operations in India. This comes largely on the back of savings in labour costs.
According to the latest report by the Indian rating agency ICRA, labour costs for setting up a call centre in the United States works out to $57,600 annually against just $8,640 a year for setting up similar facilities in India.
ICRA justifies this savings based on the annual salary of a skilled worker in the IT industry amounting to $15,000 in India against his US counterpart's salary package of $75,000.
General Electric is reported to be saving an annual sum of $340 million from outsourcing its services to its Indian operations.
A study undertaken by Deloitte Research stated that on the current $2,340 billion cost base of global financial services, there will be a bottomline cost savings of nearly $138 billion by 2008 on account of outsourcing.
At the same time, the Indian labour force and the domestic industry are equally gaining tremendously.
The state capital of New Delhi is currently attracting the maximum number of new BPO players with a market share of 18 per cent, followed by Mumbai's 16 per cent market share.
The IT centres in the country -- essentially Bangalore, Hyderabad and Pune -- have a lesser share in the BPO pie, with 13 per cent, nine per cent and two per cent, respectively.
The government's decision in the Interim Budget that foreign companies outsourcing their services to India will continue to be taxed unless the services outsourced are ancillary and auxiliary in nature, has not been welcomed by the industry, stated PricewaterhouseCoopers' executive director Vivek Mehra.
The finance minister's address reiterated the circular issued by the Central Board of Direct Taxes wherein foreign entities outsourcing core processes to Indian BPOs will now have to pay taxes.
Core processes essentially are those that give the company a strategic advantage and are directly related to the production of goods and services.
However, the industry is up in arms demanding that the government ought to treat BPOs as they treat foreign companies outsourcing production of goods to India, which are not taxable.
"In the case of related parties, transfer pricing on arms-length principle could be the answer," said Mehra.
In fact, the Indian resident party providing the services/goods outside India enjoys tax holiday benefits as software technology parks/export oriented units/special economic zone units.
So it is ironical that the foreign companies buying the services from India is sought to be taxed in case they are sourcing non-auxiliary/non-ancillary services and a permanent establishment/business connection is established, he added.
ICRA estimates that India's share in the global BPO industry will grow from 33 per cent in 2003 to 42 per cent in 2006 as the world BPO market increases from $419 billion in 2003 to $719.77 billion in 2006.