National Association of Software and Service Companies warned on Tuesday that the move to tax core services of captive business process outsourcing units of multinationals will drive them away from India to other tax friendly countries.
As of now captive BPO businesses would be affected. There is a strong possibility that they would move out to alternative locations like China and the Philippines, which have tax friendly environments, the software association president, Kiran Karnik told reporters.
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The government has exempted the non-core activities from the ambit of tax, but has imposed the same on core activities. Core activities by definition are higher value activities, he said adding there is going to be a lot of litigation and uncertainties.
"It is not a good move, and has come at a wrong time. This is the time to boost the sector not to tax the sector," Karnik said adding this would keep away MNCs seeking to set up BPO operations in India.
Already three MNCs have held back their future BPO plans for India, he said declining to disclose their names.
Karnik echoed the same sentiments as expressed by EU trade commissioner Pascal Lamy on Monday in asking India to open up services.
"Recognise the advantages of opening up..(the services sector). The opportunities are huge," he said referring to the accounting and legal professionals who have opposed to India opening up the services sectors.
Stressing that opening up of services was beneficial to everybody, Karnik said the only difference could be on how to go about implementing it.
"Like in software few years ago, many wondered whether or not competition will eat us up. We not only proved that wrong but also proved that opening up is good," Karnik said.
"Our prescription to the people in legal and accounting professions is that you are fighting a losing battle. By opening up the services the opportunities are huge. There are of course issues and problems. But the overall perspective is clear," he said.
He added that if India opens up the accounting sector, Indian accountants will get very attractive jobs, employment will go up, and like Indian IT professionals, opportunities for them to work inside and outside the country are immense.
On Monday Lamy said he was disappointment with India's offers on trade in services saying it failed to redress the current low level of Indian GATS (General Agreement on Trade in Services) commitments, and in some areas, doesn't even reflect the current level of openness in the Indian market.
