Jaswant Singh's Interim Budget has lent further scope to Central Board of Direct Taxes officials to examine business process outsourcing companies by introducing the qualifications of "auxillary and ancillary" activities as distinct from core.
Amitabh Singh, a transfer pricing expert with Ernst & Young, said a fresh circular had become essential as the new definition was more restrictive than that outlined in the CBDT circular.
He said since the transfer pricing guidelines had already empowered tax officials, the minister could have avoided using fresh jargon to complicate matters.
In January this year, the CBDT had issued a circular saying if a multinational company outsourced any part of its core function to India, it would be taxed in India.
But non-core businesses, including answering sales queries over telephone or even booking orders for goods and services to be delivered abroad like insurance, credit cards or items like computers, would not come under the income tax net.
A finance ministry official said the idea was to exempt BPO companies that were enabling the foreign company perform its core activity. If the BPO itself performs a part of the core business activity then the department will take its pie.
He said, "Take for instance, a travel agency, which runs the business of booking orders. If the travel agency is setting up a branch in India, it is the same activity. The agency will be subject to tax in respect of the profits made by the Indian branch."
The official cited another instance. "A foreign company manufactures and sells perfumes abroad. If there is a BPO firm in India, which tele-markets perfumes for the foreign company to be delivered abroad, the department is overlooking this also."
Reacting to this, Srinivasa Rao of E&Y said, "The distinction that has been drawn between core and auxiliary/ ancillary activities is judgemental. There is a shade of grey where the government exempts tele-marketing from tax but puts the branch of the travel agency under the tax net."
According to him, most of his clients were looking for additional guidance. Rao, however, said it would be too early to say that the BPO business is suffering or there is a slowdown.
Acknowledging the scope of the problem, revenue secretary Vineeta Rai on Tuesday said the CBDT may issue a fresh circular if necessary.
Indian business process outsourcing companies and multi-national companies with BPO operations said that the finance minister's Budget proposal regarding taxing the sector has created confusion.
According to industry sources, companies are expected to make a fresh presentation before the government to seek a complete exemption from taxes or a clarification on the issue. Companies allege the government has not clearly defined what ancillary and auxiliary services are and this could lead to multiple interpretations.
Besides, they say, the BPO operations normally handle multiple process and it would not be easy to define what the main services were.
"There is no clarity in the recommendations. We will approach the government and authorities on this issue," said N R Narayanamurthy, chairman and chief mentor, Infosys Technologies.
The National Association of Software and Service Companies stuck to its earlier stand and said the government needed to give tax exemption to all BPO services and a move to tax certain activities would not be healthy for the growth of the sector.
"This move will hamper the growth of the sector, Nasscom President Kiran Karnik said.
According to Shantanu Rudra, chief financial officer, Daksh eServices, "Even though the abolition of tax on the BPO sector is a positive move, clarity is required on segregation between core and non core activities, which the finance minister's comments have not addressed. Clarity is required on what processes would get taxed in the hands of foreign companies."
BPO companies point out that companies come to India for cost savings and such a move can hamper the prospects of investments and even existing operations going out of the country.