December, 2004

After months of uncertainty, the tax department has issued a circular to settle dust on the question of taxation of foreign companies with outsourcing units in India. The income of a foreign company with an outsourcing arm in India will be liable to tax if the latter qualifies as a permanent establishment (PE). According to the circular, a foreign company is treated as having a PE in India if the company carries on business in India either through a sales office or an agent (other than an independent agent).

The amount to be taxed in India will be the Indian outfit’s arms-length income i.e. the income which the Indian unit would earn had it been a separate enterprise, dealing independently with its head office. Simply put, if the foreign company has a fixed place of business of its own in India or functions through a dependant agent, it will be construed to have a PE in India and will be liable to tax.

The new tax circular has been issued after withdrawing a controversial circular issued early this year. The earlier circular differentiated between ‘core’ and ‘incidental’ services of the Indian units for tax purposes.

December, 2004

According to a recent report by PriceWaterhouseCoopers, the Indian IT-enabled Services sector is expected to grow 40 per cent year-on-year in 2004-05 to touch $5.1 billion. The corresponding figure for the previous year is 46 per cent at $3.6 billion. In percentage terms, the IT enabled services outsourcing sector has increased its share in total revenue of India's IT software and services industry from 6.5 in 1998-99 to an estimated 29 in 2003-04.

PwC’s report also states that global corporations are generating huge cost savings - in the range of 40-60 per cent depending on the process offshored to India where manpower costs are 70-80 per cent less than in the US and UK. Noting that Indian outsourcing companies are adopting global quality standards like six sigma, COPC and ISO 9001, PwC’s Report also states that apart from savings in manpower and allied costs, Indian companies offer 20 per cent higher productivity in comparison to other competing countries like Philippines, Canada and Australia.

Another study by Assocham, a premier all India chamber of commerce comes out with very much the same forecast for the industry.

July, 2004

In what is being called the mother of all outsourcing deals in India, Wipro, along with IBM, has bagged a USD 1 billion, long-term contract from Shell Group. IT outsourcing deals flowing into the country till now had not exceeded $200-300m while majority of the contracts have been less than USD 100 million.

The outsourcing deal is expected to cut Shell Group’s huge IT budget by about $850m per annum and trim its worldwide IT staff of about 9,300 by 20 percent to 30 percent by the end of 2006. The outsourced services include high-end IT and back office jobs to support accounting and marketing and processing departments. Shell has rebranded these outsourced services as Group IT Infrastructure (GITI), wittingly also called ‘Give It To India’.

For IBM’s India centre which has about 15,000 workers (ramped up by its recent acquisition of 6,000-person from an Indian company, Daksh), the Shell deal has come close on the heels of bagging another mega deal worth about $700m from telecom major Bharti Telecom.

July, 2004

With top multinationals making a beeline to India for setting up R&D centers, India is poised to become the new IT lab of the world. Some of these companies are:
- Google - the world’s largest search engine, is all set to open a R&D centre in Bangalore. Leading Web portal Yahoo already carries out R&D work in Bangalore;

- Intersil - US-based chip maker is setting up a design centre in Bangalore. Intel already employs 1400 employees here.

- IBM – IBM has set up a research lab in Delhi to tap Indian scientific talent, one of the eight such labs in the world. It has 70 researchers in India.

- Nokia – the mobile phone giant to set up a R&D hub in India.

- Motorola - Thirty per cent of all software for Motorola’s latest phones is written in India.

July, 2004

According to data released recently by the National Association of Software and Service Companies (NASSCOM), the country's software services and business process outsourcing services business is booming despite slow growth of IT spending globally.

According to the Report, India's software and services exports business recorded revenue of $12.5 billion in the fiscal year 2003- 04 - up by 30.5% over revenue of $9.6 billion in the previous year and added 70,000 new jobs. Subsidiaries of multinational companies accounted for 65% of outsourcing revenues. The U.S. and U.K. markets accounted for almost the entire revenue viz. 85%.

NASSCOM figures also reveal that 112 start-up companies set up operations between April 2003 and March 31 2004 - up from 47 in the previous fiscal year - aiming to cash in on the high growth in the software and services sector.