Taxation strategies in an Indian BPO context: challenges and opportunities

Abstract

India is an enviable situation in 2007 when all large Global corporations are competing to shift their IT service and Back Office Processing operations to India to leverage the availability of skilled, low cost labor and the changed regulatory environment. In 1991, when India embarked on the liberalization route, foreign investors were given Tax Holidays so that they would come and invest in India and bolster the Indian economy. Along with other favorable factors India is now acknowledged as Best Services Location in the world1. However, there is a worry that this may change due to factors such as the appreciation of Indian Rupee against dollar, higher wage costs, more competitive alternative business destinations in Asia and above all the change in the status of Tax holiday. This Tax holiday (under Sec 10A of the Income Tax Act) is now slated to come to end 31st March 2009 which would lead to reductions in margins of these organizations coming under Sec 10A.This report Taxation Strategies of India BPO Companies is an exploratory research effort to understand one of the several challenges that the BPO industry faces in 2007.The first section of the report explores the growth of the Indian BPO industry. The second section deals with the present taxation environment, the tax holiday incentives present to set up business in India and would explore the alternatives that are present. This section would also investigate issues related to Permanent Establishment, Transfer Pricing and Double Taxation Agreement by studying present CBDT circulars, Case rulings and interview Industry experts. Third and the final section relates to finding answers to some of the questions raised in the report.