Service tax on BPO companies

Budget 2003-04 has increased the service tax rate from 5 per cent to 8 per cent and has brought ten new services within the tax net. One of the new taxable services is: " any service provided by a commercial concern in relation to business auxiliary service".

Definition
Business auxiliary service has been defined as:
"Any service in relation to:
(i) Promotion or marketing or sale of goods produced or provided by or belonging to the client; or
(ii) Promotion or marketing of service provided by the client; or
(iii) Any customer care service provided on behalf of the client; or
(iv) Any incidental or auxiliary support service such as billing, collection or recovery of cheques, accounts and remittance, evaluation of prospective customer or public relation services, and includes services as commission agent, but does not include any information technology service." (Emphasis supplied).

Thus the definition of the term business auxiliary service encompasses wide range of services. Services like client query processing, billing, accounting service, payroll services, telemarketing, etc. would now be in the ambit of service tax. Further, Notification 2/2003 dated March 1, 2003 has withdrawn the earlier notification that provided exemption from service tax in respect to payments received in foreign exchange. The combined effect would mean that most of the services that are typically rendered by BPO companies and call centers to their foreign or Indian clients could attract service tax at the 8 per cent.

Exception
Service rendered by the BPO companies would not be subject to service tax if the services can be classified as "information technology service". The explanation to the definition defines information technology service as under:

"Explanation - For the removal of doubts, it is hereby declared that for the purposes of this clause 'information technology service' means any service in relation to designing, developing or maintaining of computer software, or computerized data processing or system networking, or any other service primarily in relation to operation of computer systems." (Emphasis supplied).

An analysis of the above explanation reveals that the term information technology service has been defined in a very restrictive manner and thus would cover only those services which are in relation to designing, developing, maintaining and operation of computer software/computer systems and system networking. Most of the above-mentioned categories do not apply to services provided by the BPO companies. Computerized data processing is the only exception that could be applied to the BPO operation. However, several services of a BPO company like medical transcript, billing, etc. may not fall within the category of computerized data processing and hence the service tax may be applicable.

However, the explanatory memorandum to the Budget seems to indicate otherwise. The relevant portion of the explanatory memorandum reads as under:

"Business promotion and support services including customer care services. These services include launching of products, customer education programmes, conduct of seminars, help desk services, managing front offices, enquiry bureaus, etc. however computer enabled services, namely, data processing, networking, back office processing, computer facility management shall not be subjected to service tax." (Emphasis supplied).

The language of the explanatory memorandum suggests that the intention of the government was to exclude computer enabled data processing as well as computer enabled back office processing services from the service tax. However, the definition of 'business auxiliary services' covers most of the back office processing services as taxable services except the services that are computerized data processing services. The term computerized data processing is restrictive than the term computer enabled data processing. Furthermore, computer enabled back office processing is missing from the section altogether. This leads to the conclusion that the action does not match the intention.

To conclude, keeping in the view the tremendous growth potential of this industry and the desire of Indian government and industry to be hub of back office services, it would be required on the part of the Government to clarify whether the intention expressed in the explanatory memorandum but inadvertently not contained in section, applies.