New Delhi: The Government said today (Jan 2, 2004) there would be no income tax on BPO (business process outsourcing) firms providing only "incidental services" through call centres to companies abroad, while those offering core services, including software maintenance and development, would be taxed.

BPO units offering incidental services do not generate income separately and that it was difficult to determine the profits generated by the Indian BPOs to the foreign company, which had outsourced the services, Central Board of Direct Taxes (CBDT) said, reasoning for the tax exemption.

Moreover, the services rendered by such BPOs resulted in an "insignificant" profit to the principal company abroad, the CBDT noted. The Government, however, has put up a pre-condition that charges paid by foreign companies to Indian call centres should be at arm's length/fair market price.

The decision to exempt tax, which would help many call centres catering to IT, banking and insurance sectors, comes in the wake of apprehensions over a certain section of Income Tax Act which laid out that profits of the foreign companies attributable to business activities in India become taxable.

However, in the case of BPO entities undertaking core activities as software development and maintenance, debt collection service, investment consultancy and travel agent services for the principal foreign companies, such firms will have to pay income tax, CBDT said.

Such services rendered either directly to the customers abroad or through non-resident principal would be taxed since a "considerable" portion of profits derived by beneficiaries would be attributable to the activities of BPO firms in India, CBDT added.