To Service, or Not?

It’s a volcano that will not stay dormant for long. And when it does cut

loose, it will spew lava that will incinerate part of the one industry that’s

changed the way the world perceives India. Take a gander at this: the new rules

on service tax are in force. They have created concerns about whether service

tax would be applicable to India’s growing BPO industry, in particular

companies that don’t do either software or call center work, but others like

document processing and back-end work.

Changes in service tax regime



The new rules have created a category called ‘business auxiliary services’.

These services relate to promotion and customer relations activity, and accounts

and billing services. Soon after this sank in, there was apprehension that this

would impose a service tax obligation on the IT industry. The definition of

business auxiliary services makes it clear that IT services (SW development and

maintenance) wouldn’t be covered.

In the explanation to the Finance Act, the government clarified that the

category wasn’t intended to apply to SW and BPO companies. However, BPO and

call center companies were apprehensive because the actual wording of business

auxiliary services appeared to include services typically performed by them. In

June 2003, the government issued a notification exempting call centers and

medical transcription companies from service tax.

Exemption for forex-earners



What went unnoticed was a 1999 notification exempting companies earning in

foreign exchange from service tax. Since most Indian BPO companies service

overseas customers and earn in forex, it was this that actually exempted them

from payment of service tax. But for this, BPO firms could have been liable for

service tax under other categories as well, such as support activity for banking

and finance, marketing, credit rating and database retrieval, among others. The

debate on the meaning of the term ‘business auxiliary services’ overlooked

the significance of this issue–the fact that regardless of what was included

in the term, a BPO company may still need to pay service tax under other

categories, since the earlier exemption available to forex earners was

withdrawn.

Current position



The government has now exempted call centers and MT from service tax in

general, not just from inclusion within the meaning of business auxiliary

services. The effect is that even if these activities fall within the scope of

other categories, they would be exempt from service tax. That leaves the

remaining BPO companies doing back-office work, other than call center activity.

This activity has huge potential. After all, pretty much any kind of service

activity that can be performed remotely is an activity that can be outsourced to

India. The banking and finance sector may be affected.

The government has also clarified that the mere use of IT in the performance

of services wouldn’t necessarily bring such activity within the ambit of

exemption to IT companies. There appears to be a contradiction here as the

definition of IT services includes, on the one hand, development and maintenance

of software or operation of a computer system, and on the other, computerized

data processing. The latter would typically cover services performed through the

use of IT, referred to as ITeS. Under this, there appears to be some confusion

over whether BPO activity would be exempt from sales tax.

One could argue that BPO involves input of information. Would review of a

loan application and input of relevant information into the customer’s systems

be treated as computerized data processing services, even though it has a

document review aspect or doesn’t relate to SW development or maintenance or

operation of a computer system?

Finally, call center activity is that involving the use of a telephone. Many

call centers are integrated facilities providing support through different means

of communication–telephone, chat and e-mail. It would appear that only

voice-based support would be covered by the exemption and not other services.

Given this scenario, there’s clearly need for the government to address this

issue further and come up with a solution that implements what appears to be its

original intention–to exempt all BPO and IT companies from service tax.

Stephen Mathias



The author co-chairs the Technology Law Practice of Kochhar & Co, a

leading law firm.