New Delhi: National Association of Software and Service Companies (NASSCOM) today (Jan 20, 2004) warned that the move to tax core services of captive Business Process Outsourcing (BPO) units of multinationals will drive them away from India to other tax friendly countries.

As of now, captive BPO businesses would be affected. There is a strong possibility that they would move out to alternative locations like China and Philippines, which have tax friendly environments, the software association president Kiran Karnik told reporters.

The Government has exempted from tax the non-core activities and taxed the core activities. Core activities by definition are higher value activities, he said, adding there is going to be a lot of litigation and uncertainties.

"It is not a good move, and has come at a wrong time. This is the time to boost the sector not to tax the sector," Karnik said, adding this would keep away multi national companies (MNCs) seeking to set up BPO operations in India.

Already three MNCs have held back their future BPO plans for India, he said, declining to disclose their names.

Karnik echoed the same sentiments as expressed by European Union (EU) trade commissioner Pascal Lamy yesterday in asking India to open up services.

"Recognise the advantages of opening up...the opportunities are huge," he said, referring to the accounting and legal professionals who have opposed to India opening up in services.

Stressing that opening up of services was beneficial to everybody, Karnik said the only difference could be on how to go about in this process.

"Like in software few years ago, many thought whether or not competition would eat us up. We not only proved that wrong but also proved that opening up is good," Karnik said.

"Our prescription to the people in legal and accounting professions that you are fighting a losing battle. By opening up the services the opportunities are huge. There are of course issue and problems. But the overall perspective is clear," he said.

He added that if India opens up the accounting sector, Indian accountants will get very attractive jobs, employment will go up, and like Indian IT professionals, opportunities for them to work inside and outside the country are immense.

Yesterday, EU had expressed its disappointment by India's offers on trade in services saying it failed to redress the current low level of Indian GATS commitments, and in some areas, doesn't even reflect the current level of openness in the Indian market.