Indias business process outsourcing (BPO) industry is in a quandary with the service tax department asking leading companies
including Convergys, Genpact and Vertex to return refunds paid to them on claims made before March 2007.

The department argues that services provided by BPO units to clients located outside India dont amount to export as these are delivered in India. The objection finds its origin in the amendments made to the export of service rules in 2006.

As per the amendments, BPO services amounted to export, only if the recipient was located outside India, the service was delivered and used outside India and the payment was received by the service provider in convertible foreign exchange. The second condition of delivery and usage outside India was replaced in 2007 with service provided from India and used outside India.

As BPO services provided to overseas clients amount to exports, BPO firms are permitted to file either a refund claim or rebate claim of service tax paid on input services and duty paid on inputs used in provision of BPO services.
This is not the first time that ambiguity in the export of service rules has come up. In the past, various industry bodies have time and again asked the government to bring about clarity in these rules.

The service provided by BPOs is clearly an export of service. By denying refund, the BPOs in India are being made uncompetitive in an already difficult economic environment. The refund process should be made simple and the directions of Central Board of Excise and Customs (CBEC) to give 80% refund within 15 days must be followed by the field formations, Ernst & Young associate director Bipin Sapra said.

After various BPO firms received notices to return refunds on service tax payments, the IT-BPO association Nasscom has taken up the issue with the CBEC. While Genpact and Convergys did not respond to emails sent by ET, Vertex confirmed receipt of a communication from the service tax department for returning the entire tax refund.