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K. Giriprakash

BANGALORE, March 6

FOREIGN companies that outsource work to companies in India in the IT-enabled services as well as those in the BPO space are in for a major shock with the Union Budget making them liable to tax in the country. This could force foreign companies to rethink on outsourcing work to India, especially in the area of the telemarketing.

According to accounting firms, if during the course of operations the foreign company concludes a contract in India, it will have to pay taxes in the country as per the changes made in non-resident taxation regulations in the Union Budget. In case the foreign company has exposed a business connection for the non-resident in India, it can be held that they have concluded a contract here, thereby making the non-resident liable for tax in India.

According to consulting firm McKinsey, revenue of Indian companies in the two industries (ITES and BPO) could reach $21 billion - $24 billion by 2008 -- a 1,500 per cent increase from $1.4 billion in revenue this year. These segments are forecast to employ over 2 million people. Some of the big players in ITES and BPO space in India are ICICI OneSource, MsourcE, Spectramind and Daksh.

According to Mr K. R. Girish, partner, RSM Company ( accounting firm), earlier the definition of `business connection' did not include business activities carried on by a person acting on behalf of a non-resident. Now as per an amendment made in Section 9 (1) (i), the agent who has authority to conclude contracts or who has certain authority, but regularly delivers goods or merchandise on behalf of the non-resident or habitually secures orders mainly or wholly for the non-resident, such a person is said to have concluded a deal in the country.

Such an agent will not have an independent status as he mainly works for the non-resident and there is a common control between the Indian company and that of the foreign company. The kind of work being carried out in India on behalf of the foreign company could be in the nature of telemarketing where business is solicited in various forms and contracts are struck, even though no documents are exchanged.

According to Mr Girish, such a provision was not there in the Act, but now it has been imported from the language incorporated in the double taxation treaties to bring the definition of `permanent establishment' under the business connection definition.

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