The Indian BPO industry has been growing in the recent years and NASSCOM predicts this growth to continue in 2013. But the industry is facing several challenges like competition from countries like Philippines, rising labour cost and Obama effect. Transfer pricing has been an issue which has been haunting the industry for quite a few years now.
Transfer pricing mechanism has been extensively used by companies to evade tax. The companies lower prices in the countries where the tax rates are high and charge higher prices in the countries where the tax rates are low. This helps them in increasing their overall profits. The BPO companies are taking advantage of this because most of them operate in multiple locations.
The Indian IT/BPO industry has been struggling with tax laws since last March 2011 and the experts feel that Government has not addressed this issue in the recently presented Union Budget. The industry which was already grappling with many issues witnessed an announcement of increase in Service Tax rate by the Union Finance Minister. The service tax rate was increased to 12 % in Union Budget 2012. A new provision to enable Advance Pricing Agreements was also proposed in the Finance Bill 2012. The industry experts feel that the new ITO/BPO tax provision is about to get complex with new provision of Transfer Pricing Agreement.
BPO executives are of the view that the new Transfer Pricing Agreement is arbitrary and tax officials are making unreasonable demands from the companies. They feel that till last year the BPO companies which were operating from Software Technology Parks of India were given full income tax rebate. But this year, they are concerned about the new transfer pricing regime put forth and they even feel that there are chances that profit for this particular year will also be taxed. This will significantly add tax burden to the already struggling BPO firms.
The issue of transfer pricing is getting murkier as there is no clarity among the income tax officials as well but the income tax officials clarify that the demands of the industry are unreasonable. They say that tough steps are been taken as there are instances of companies showing a lower profit in India and parking their surplus in some other company thereby avoiding taxes.
The transfer pricing laws are still at a very nascent stage in India and the experts feel that India should adopt international standards so that the number of litigations come down. NASSCOM has been lobbying for several years now for a streamlining transfer pricing mechanism and the government should take aggressive steps in this regard. Even though the Advance Pricing Agreement introduced in the new Finance Bill is a step in the right direction, a lot still needs to be done in this regard.