The revenue department has created needless uncertainty on the tax liability of foreign parents and principals of business entities in India, by suddenly withdrawing a 40-year old circular. It needs to bring out another circular at the earliest, clarifying that its intention is not to endanger India’s thriving outsourcing industry, particularly the captive units which generate about 35% of the sector’s revenue.

The Income Tax Act requires foreign companies to include in their income taxable in India any income arising from or through its business connection in India.

There are no clear-cut rules to define a business connection. The circular that has now been withdrawn had been successfully interpreted, to the chagrin of the tax department, to put the income generated for a foreign company by a business process outsourcing unit in India outside the ambit of taxation in India.

The only condition was that the foreign client should fully compensate the Indian BPO for its services, something that is not readily guaranteed if the Indian BPO is a subsidiary of the foreign client.  Full news

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