India hands out new offshore BPO tax breaks

The Indian government has introduced new tax breaks designed to head off any threat of firms withdrawing business process outsourcing (BPO) operations and moving them to cheaper offshore locations.

Multinational corporations with captive BPO subsidiaries in India will now have their non-core operations exempt from income tax. This means incidental services such as the conclusion of contracts and buying orders won't be taxed.

The latest move comes amidst analyst and industry speculation that a combination of a possible Indian IT skills shortage and a customer backlash against firms who move operations to the region could lead to organisations looking at other offshore locations.

Despite this the BPO market in India is booming and the latest figures this week from Indian IT trade group Nasscom predict that Indian BPO will grow by 54 per cent during 2004 to $3.6bn in revenue.

But the move has led to confusion and concerns that the Indian government is moving to levy income tax on the core activities of BPO subsidiaries, with most firms currently exempt until 2009 as part of the package that enticed them to India in the first place.

Sanjeev Aggarwal of Indian BPO firm Daksh told the Times of India that such a move could force organisations to look for more competitive offshore locations.

"We have built the BPO industry on tax breaks. Come 2009, if the tax holiday for all these firms is not extended, international clients will move to other tax-friendly countries like the Philippines or Mauritius," he told the paper.

Georgina O'Toole, analyst at Ovum Holway, said Dell's decision to re-route its customer calls away from India in November increased fears of a customer backlash against companies with captive outsourcing operations in the country.

"Clearly, the Indian Government, which has successfully used tax breaks to encourage its own IT industry, is now attempting to employ fiscal means to prevent more such withdrawals," she said.

Others have predicted a backlash against companies that relocate customer service operations such as call centres to offshore locations through BPO.