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BPOs may soon run into tax
July, 19th 2006
The bells have begun to toll for the BPO sector. All those smart alecks with the next bright BPO idea and funding to bring it alive could well take it to overseas hubs such as Philippines, Vietnam, China or even down under to Sri Lanka.

By 2009, tax sops to the BPO sectors will be withdrawn. Thats included in the 35-40% cost advantage that Indian BPO firms factor into bids to their overseas clients. Take away the sops duty exemption on import of equipment and on earnings and the profit before tax will be down by almost a third from the current 15-20%.


Guess why? Come 09, tax sops to the sunrise sector are set to be withdrawn. Now thats included in the 35-40% cost advantage that Indian BPO firms factor into bids to their overseas clients. Take away the sops duty exemption on import of equipment and on earnings and the profit before tax will be down by almost a third from the current 15-20%.
Both the IT and BPO industry have been clubbed together under Section 10A and 10B. Thus, while the IT sector has enjoyed tax breaks for over 20 years, the BPO industry has had very little time to benefit from this. While the IT industry is mature enough to exist without tax breaks, the BPO industry relies on both people costs as well as infrastructure costs in the labour arbitrage scenario.


This development will have a very adverse impact on the BPO industry both foreign investments and the Indian entrepreneurs will suffer, Kiran Karnik, president, Nasscom, told ET. While Nasscom feels India is sufficiently ahead of the other countries when it comes to offshoring capabilities, the industry will go where there is best value for money. Fiscal benefits are an extremely important factor in Indias attraction as an offshore destination and with 33% in taxes, the ratio of investments in India versus other countries will change.

The BPO industry is growing at 37-40% a year with revenues of $6.3bn in 05-06. This is expected to cross $8bn by March 07, with an employee base of over 500,000. As an entrepreneur, I will look at other countries which offer me tax breaks for the next ten years, without considering the year that I enter their country, says Raman Roy, founder, Quatrro.

Sumit Bhattacharya, executive VP, HCL Technologies BPO Services, says: Companies will have to build new pricing models if the sops are withdrawn. The industry will have to look at automation, process efficiency and also get into high-end processes.

The governments action has so far spurred growth. Why would they try to choke the golden goose? Other countries are an option, but the depth, breadth and quality of manpower is limited outside India.

Any new IT/BPO unit set up after 09 will be taxed on the income that they earn. Tax sops from the software technology parks of India (STPI) also disappear for these companies making investments in countries like China, Sri Lanka and Philippines an attractive investment option.

Susir Kumar, CEO, Intelenet, says: Profit margins are in the region of 15-20%. If the sops are withdrawn, it will have a negative impact on profit margins. However, if all companies, be it STPI or SEZ-registered, are taxed, there may be no hue and cry over sops being withdrawn. As things stand today, STPI will withdraw sops by 09 and SEZs will have them till 14, Mr Kumar adds.
 
Entrepreneurship could also be impacted. The BPO sector has seen maximum entrepreneurship in the last six years, but with the government abandoning the fledgling sector, entrepreneurial ventures in one of the highest employment-generating sectors could go down dramatically.

The situation today is a lose-lose proposition for both the BPO industry and the government as the latter will lose more in terms of indirect taxes than it will gain from taking away tax breaks.


Both the IT and BPO industry have been clubbed together under Section 10A and 10B. Thus, while the IT sector has enjoyed tax breaks for over 20 years, the BPO industry has had very little time to benefit from this. While the IT industry is mature enough to exist without tax breaks, the BPO industry relies on both people costs as well as infrastructure costs in the labour arbitrage scenario. Taking away tax sops will adversely affect this scenario since investments will be re-directed into other countries.

Says Vasu Ramaswami, CEO, CFC International India services (subsidiary of Countrywide Financial Corp), I believe India will be an attractive destination for some time to come. The tax sops make India attractive among other things. SEZs will provide continuity of tax breaks, but there are issues regarding land and infrastructure there. We believe that sops will be extended as the industry is in the growth phase.

The situation today is a lose-lose proposition for both the BPO industry and the government as the latter will lose more in terms of indirect taxes than it will gain from taking away tax breaks.
 
 
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