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The problem of Transfer Pricing in the Indian BPO sector

We all have heard much about the BPO boom in India and its remarkable benefits that it has served India with. But in recent times, the future of the industry is predicted to become bleak due to the government’s imposition of Transfer Pricing Agreement and additionally levying an increased tax rate at 12%. This is one of the many issues that is seen challenging the BPO industry’s growth.

What is Transfer Pricing?
It is the price that is being charged by one part of the company for products and services it provides to another part of the same company, in order to calculate each division’s finances separately.

Its purpose:

To ensure that a fair price is charged, tax authorities make sure that goods and services are sold at a price the company would seek from an unrelated third party. The purpose is to make companies reflect the fair amount of profit and not avoid tax.

What is the fuss about the Agreement?
The BPO companies in India feel that the new Transfer Pricing Agreement is arbitrary and that the taxes are being too much demanding and unreasonable.  The BPO companies make an argument that until last year the BPO companies which were operating under the Software Technology Parks of India, were entitled to full income tax rebate. But now the companies are worried about this year’s profits fearing that it will be taxed, proving burdensome for the already burdened industry.

On the contrary, the income tax officials are keen on this tax as they prove enough evidences of companies showing deliberate lower profits in India and then transfer their surpluses in some other company thereby evading tax payments.

All in all, the government’s legislation in this order to reduce tax evasions is indeed an ideal step but in order to have an exact and balanced effect, it would be good enough to consider all the parties and then come up with a suitable legislation, which is fair to all the parties.