Business Process Outsourcing to India – Current Understanding

In recent months the growing phenomenon of off-shore outsourcing – particularly to India – has featured in many news headlines. One of the key factors underlying the decision to outsource off-shore is cost and India has rapidly captured a significant share of the US and European market for off-shore outsourcing, particularly for business process outsourcing ("BPO"), on the basis of low cost high quality services. However, a recent tax circular may be about to change things.

On 2 January 2004 the Indian Central Board of Direct Taxes ("CBDT") issued Circular No. 1/2004 which seeks to tax the earnings of foreign companies attributable to the outsourcing of "core" activities. Already there have been reports of multinational corporations revisiting plans to outsource call centres and other activities to India.