The United States is unlikely to be the only villain in the outsourcing story. If the industry is to be believed, the enemy lies within.
The ambiguous tax and transfer pricing laws are a greater cause for heartburn for the domestic BPO industry than doomsday predictions of the backlash.
"Lack of clarity in tax laws will only discourage foreign companies from investing in or outsourcing to the country. China's tax laws are far simpler and better defined. If we are not careful we will miss this BPO tide," cautioned Rathin Datta, chief executive officer and chairman, PricewaterhouseCoopers.
The confusion is not restricted to tax laws alone. There are other grey areas as well like transfer pricing.
"Transfer pricing margins have not been laid down by the government. It's typically in the 5-20 per cent range presenting further scope for subjective interpretation and ambiguity," said Mukesh Bhutani, national tax director, Ernst &Young.
Even though the US Senate bill, which bars outsourcing of government contracts, has not managed to unsettle the BPO industry, the month-old Central Board of Direct Taxes circular on the taxability of non-residents BPO businesses has got the industry worried.
Though the stated objective of the circular was to determine the certainty of BPOs and ensure the uniformity in tax treatment, it seems to have opened up a Pandora's box of sticky issues.
A number of questions have arisen. For instance, how does one define 'incidental' and 'core' activities? Will the benefits of the circular be available to BPO units that have a loss? What is the tax impact if some customers of a non-resident's BPO, especially in call-centre business, are in India? Will the effects of the circular be retrospective?
Datta warns of other dangers of not laying down a safe harbour rules for margins which should be charged on the 'arms' length pricing' of BPOs.
