The Central Board of Direct Taxes is working on a proposal to levy a presumptive tax on business process outsourcing by multinational companies.
The move follows the controversy over the distinction made by the CBDT between the core and non-core business of BPOs for taxation purposes.
A CBDT circular issued in January had said if a multinational company outsourced any part of its core function to India, the company would be taxed in India for the income originating in the country.
But non-core business, including answering sales queries over telephone or booking orders for goods and services to be delivered abroad, like insurance, credit cards or items like computers, will not come under the income-tax net.
The presumptive tax move is, however, unlikely to placate the information technology industry, which has said there is no reason to impose any tax on the sunrise industry because of its huge employment potential.
But tax officials say industry must pay tax on its income. They say the distinction between the core and non-core functions in the board circular is in any case meant to bring only value-added services into the tax net.
The officials said since certain issues regarding the presumptive tax were unlikely to be sorted out before the Budget, the ministry might have to bring in an amendment later, during the passage of the Finance Bill in Parliament.
The officials felt that such a tax was not difficult to impose as it would be levied under the transfer pricing rules. This will help clear the confusion over whether a BPO operation constituted a permanent, and hence, taxable establishment for the MNC. It is also easier to administer.
They also said since India had double tax avoidance treaties with most European countries and the United States, the companies would get a tax credit in their respective jurisdictions.
However, tax analysts feel that a presumptive tax will not settle the primary issue of whether the BPO operation constitutes a permanent establishment for the MNCs, and can be misused.
The new move
- Presumptive tax is levied on sectors like power projects, oil and gas exploration, and shipping. The tax rates vary from 2 to 10 per cent
- Move aimed at sorting out the confusion over whether the BPO operations of multinationals are taxable
- Presumptive tax is easier to administer under transfer pricing rules
