BPOs may soon run into tax trap

BPOs may soon run into tax trap
SHELLEY SINGH AND AMANPREET SINGH

TIMES NEWS NETWORK[ WEDNESDAY, JULY 19, 2006 12:00:00 AM]

NEW DELHI: The bells have begun to toll for the BPO sector. All those smart alecks with the next bright BPO idea and funding to bring it alive could well take it to overseas hubs such as Philippines, Vietnam, China or even down under to Sri Lanka.

By 2009, tax sops to the BPO sectors will be withdrawn. That’s included in the 35-40% cost advantage that Indian BPO firms factor into bids to their overseas clients. Take away the sops — duty exemption on import of equipment and on earnings — and the profit before tax will be down by almost a third from the current 15-20%.

Guess why? Come ’09, tax sops to the sunrise sector are set to be withdrawn. Now that’s included in the 35-40% cost advantage that Indian BPO firms factor into bids to their overseas clients. Take away the sops — duty exemption on import of equipment and on earnings — and the profit before tax will be down by almost a third from the current 15-20%.
Both the IT and BPO industry have been clubbed together under Section 10A and 10B. Thus, while the IT sector has enjoyed tax breaks for over 20 years, the BPO industry has had very little time to benefit from this. While the IT industry is mature enough to exist without tax breaks, the BPO industry relies on both people costs as well as infrastructure costs in the labour arbitrage scenario.

“This development will have a very adverse impact on the BPO industry — both foreign investments and the Indian entrepreneurs will suffer,” Kiran Karnik, president, Nasscom, told ET. While Nasscom feels India is sufficiently ahead of the other countries when it comes to offshoring capabilities, the industry will go where there is best value for money. Fiscal benefits are an extremely important factor in India’s attraction as an offshore destination and with 33% in taxes, the ratio of investments in India versus other countries will change.

The BPO industry is growing at 37-40% a year with revenues of $6.3bn in ’05-06. This is expected to cross $8bn by March ’07, with an employee base of over 500,000. “As an entrepreneur, I will look at other countries which offer me tax breaks for the next ten years, without considering the year that I enter their country,” says Raman Roy, founder, Quatrro.

Sumit Bhattacharya, executive VP, HCL Technologies BPO Services, says: “Companies will have to build new pricing models if the sops are withdrawn. The industry will have to look at automation, process efficiency and also get into high-end processes”.

The government’s action has so far spurred growth. Why would they try to choke the golden goose? Other countries are an option, but the depth, breadth and quality of manpower is limited outside India.”

Any new IT/BPO unit set up after ’09 will be taxed on the income that they earn. Tax sops from the software technology parks of India (STPI) also disappear for these companies making investments in countries like China, Sri Lanka and Philippines an attractive investment option.

Susir Kumar, CEO, Intelenet, says: “Profit margins are in the region of 15-20%. If the sops are withdrawn, it will have a negative impact on profit margins. However, if all companies, be it STPI or SEZ-registered, are taxed, there may be no hue and cry over sops being withdrawn. As things stand today, STPI will withdraw sops by ’09 and SEZ’s will have them till ’14,” Mr Kumar adds.

Entrepreneurship could also be impacted. The BPO sector has seen maximum entrepreneurship in the last six years, but with the government abandoning the fledgling sector, entrepreneurial ventures in one of the highest employment-generating sectors could go down dramatically.

The situation today is a lose-lose proposition for both the BPO industry and the government as the latter will lose more in terms of indirect taxes than it will gain from taking away tax breaks.


Both the IT and BPO industry have been clubbed together under Section 10A and 10B. Thus, while the IT sector has enjoyed tax breaks for over 20 years, the BPO industry has had very little time to benefit from this. While the IT industry is mature enough to exist without tax breaks, the BPO industry relies on both people costs as well as infrastructure costs in the labour arbitrage scenario. Taking away tax sops will adversely affect this scenario since investments will be re-directed into other countries.

Says Vasu Ramaswami, CEO, CFC International India services (subsidiary of Countrywide Financial Corp), “I believe India will be an attractive destination for some time to come. The tax sops make India attractive among other things. SEZs will provide continuity of tax breaks, but there are issues regarding land and infrastructure there. We believe that sops will be extended as the industry is in the growth phase.”

The situation today is a lose-lose proposition for both the BPO industry and the government as the latter will lose more in terms of indirect taxes than it will gain from taking away tax breaks.

OFFSHORE OUTSOURCING GUIDE

2006 Global Outsourcing Guide

Risks, rewards, challenges and opportunities, country by country.

BY STEPHANIE OVERBY

In all the discussion about outsourcing, one simple fact sometimes gets lost: Nobody beats the United States when it comes to people with IT skills. Taking into account the size and availability of the labor force, their education, relevant experience, language skills and turnover rates, A.T. Kearney ranked America tops in this area on its 2005 Global Services Location Index.

But labor arbitrage—cutting costs by exploiting the availability of lower-wage workers—remains the name of the game in IT sourcing. CIOs continue to seek savings through offshore outsourcing, and the Everest Research Institute predicts those savings will continue to drive sourcing offshore for the next 30 years. Today, 73 percent of Fortune 2000 companies say offshoring is an important part of their overall growth strategy, according to the 2005 Duke University CIBER/Archstone Consulting study. And Gartner predicts worldwide offshore spending will reach $50 billion next year.

In this, CIO's third global outsourcing guide, we observe how the offshoring world has changed. (View previous guides here.)

The Executive Summary

India remains the leading offshore destination by a wide margin, particularly for U.S. and U.K. companies. "Every year, the risks of moving work to India get lower," says Dean Davison, VP of strategic outsourcing for Nautilus Advisors. "India is increasingly more adept at IP protection, providing resilient infrastructure and managing global relationships effectively." Although Gartner estimates that India currently holds 80 percent to 90 percent of the offshoring market, wage inflation and the increasing maturity of other low-cost areas threaten its future dominance. And as India's star has risen, so have its turnover rates—a growing concern for CIOs. Consequently, Davison expects India's market share to shrink 20 percent by 2010.

Today, less than 10 percent of American companies outsource to more than one country but "most are evaluating multiple locations," says Davison. China, for example. Experts say it could be a powerful rival to India in the next three to five years, even though it currently can't match India's large English-speaking workforce, its level of compliance with international law or its number of IT grads.

Labor and operational costs in Central European countries such as Poland, Hungary and the Czech Republic—attractive outsourcing options for Western European businesses—continue to rise, approaching the level of their customers. So penny-pinching European CIOs are looking deeper into the former Soviet bloc, to countries like Romania, Bulgaria and the Ukraine. Latin American destinations such as Costa Rica, Mexico and Brazil are beginning to attract U.S. back-office and call center work as the need to service Spanish-speaking markets grows. And A.T. Kearney suggests that the Middle East and Africa may be the next frontier for offshore operations—if the politics of the area stabilize.

Although labor costs will continue to be the driving factor behind offshoring, CIOs must internalize the "cost-versus-risk equation," says Ian Marriott, research vice president at Gartner. When going offshore, common risks (infrastructure stability, process maturity, security) become more conspicuous, and uncommon risks (human resource predictability, political stability, rule of law or lack thereof) emerge. Increased competition for the offshore outsourcing dollar promises to raise standards around the globe, but more opportunity equals more risk, and choosing a location is an increasingly complex decision—one we're hoping the "2006 Global Outsourcing Guide" will help you make.

Download the 2006 Global Outsourcing Guide >>
(PDF 6.5MB)

Incorrect Guidance
Posted: JUL 18, 2006 11:25:13 AM
I have taken many companies offshore. Symantec, Adaptec, Allied-Signal, Flying J, Tibco, are a few of the more well known companies. I find this guide to be guiding people down an incorrect path. In addition to my own "hands-on" experience, if you check the research done by Gartner, Deloitte-Touche, Price-Waterhouse-Coopers and others, you will find that China is a distant third to Russia, who is a distant second to India. It may be in vogue to say that "China is Challenging", but they just do not have the infrastructure, communications ability, applications or process knowledge necessary to support companies in the same manner as an Indian firm.
Dean Lane
CEO
VariTRAK

OPEN SOURCE - Dirty Code, Licenses and Open Source

The intricacies of free and open-source software licenses require an honest conversation between you and your legal department.
BY CHRISTOPHER LINDQUIST

Karen Copenhaver, a partner at law firm Choate, Hall & Stewart, tells a story about running a seminar for a large company. The goal of the seminar was to make it clear that software developers had a responsibility to abide by their company’s guidelines surrounding the use of open-source, free and other third-party code.

Copenhaver thought it went well. Then the development group’s manager came up to her and said, "You know, these fellows can’t get everything they need to get done every day and worry about all of this stuff."

The manager’s words lie at the core of an issue that affects countless development departments around the globe today. Faced with shrunken budgets, tight deadlines, the fear of jobs being shipped off to the lowest bidder and expanding demands for ever-more-complicated software, programmers are tempted to grab bits, pieces and even large bites of code from various third-party sources in order to get things done more quickly.

The consequences of this (to be kind) borrowing can be anodyne; that is, no one ever notices the code, the product ships (either externally or internally), and life goes on. Or the consequences can be catastrophic. Dirty code, according to intellectual property lawyers, has led to expensive delays during many mergers and acquisitions. And thanks to the efforts of a single programmer—Linux kernel contributor Harald Welte—at least 100 companies have been forced either to remove or release as open-source various pieces of GPL code that they borrowed without properly complying with the license.

It doesn’t have to be this way. Companies can avoid problems resulting from the use of open-source code. Legal experts we spoke with offered numerous tips and tactics for maintaining the flexibility necessary to take advantage of this important tool in the software developer’s box while limiting the risk.

Assume You’ll Get Caught

Copy some code, change the variables, tweak the white space.... Who’ll ever know? Perhaps at one time there wasn’t much chance that anyone would identify code that had been illicitly lifted from someone else’s work. But times have changed. Source-code compliance tools from the likes of Black Duck and Palamida, which can scan millions of lines of code and compare them with huge databases of known software, allow companies to locate (and locate pretty quickly) previously created code—even if variable names and white space have been modified by the borrower.

Black Duck’s client list has grown more than 300 percent during the past year and now includes 11 Fortune 500/Global 500 companies. Its hosted code assessment service, ProtexIP/OnDemand, has been downloaded by hundreds of companies and has been used in more than 140 merger and acquisition due diligence transactions totaling an estimated $9 billion, according to the company. Searches for suspicious code are becoming de rigueur during the due diligence surrounding mergers and acquisitions. The culture surrounding open-source and free software has had an impact as well. Whistle-blowers have outed their employers over open-source code misuse. Some GPL violations have also been called to the attention of the world by interested users who notice suspiciously familiar behavior in commercial products. (For instance, network hardware maker Linksys, soon after its 2003 purchase by Cisco, was famously inspired to release the firmware to its WRT54G router when motivated users uncovered that pieces of the firmware were based on Linux.)

Dedicated GPL defender Welte, who owns copyrights on pieces of the Linux firewall code, has used that copyright to encourage (or, through suits brought in German courts, force) more than 100 companies either to remove infringing code or release their corporate source code to the public. The companies involved range from smaller firms to corporate giants, such as Asus, Belkin, Fujitsu Siemens and others. Welte’s plans to create a nonprofit organization in Germany to aggressively pursue such copyright infringement may help accelerate his efforts.

"In our view, it is necessary to raise public awareness and to make cases public," Welte says. But, he insists, "this is not a witch hunt or some kind of religious battle. It’s just making corporate users play by the rules when they have, for whatever reason, overlooked them."

Even given all this, the odds that you’ll get caught may still be slim. However, as open-source software finds its way into ever-more-critical systems inside your company, the risk to your company if you are caught has increased dramatically.

Talk to the Lawyers

What unusual patent provisions exist in the Mozilla Public License?

How far does the GPL go to protect derivative works?

Heck, what is a derivative work?

Like it or not, attorneys—not developers—are in the best position to answer questions like these, particularly as they pertain to your business or to your approach to using open-source software. Getting your legal department involved early is the best way to ensure against running into problems in the future. The key is to make it clear up front that open source is a critical piece of your development plans so that the legal folks will take that into account.

It might seem easier to simply avoid the hard questions, but doing so only increases your risk. "It really is incumbent on CIOs and other IT managers to understand that this is a real issue," warns Mark Radcliffe, a partner at DLA Piper Rudnick Gray Cary and chairman of a committee working to develop GPL 3.

Just because you bring in the lawyers, however, doesn’t mean you’ll get decisive answers to all your licensing questions. Open-source case law isn’t a well-trodden path. "It would be easier to advise clients if there was more case law in the area," admits Ira Heffan, an associate at Goodwin Procter who in 1997 wrote a law review article that argued that the GNU General Public License was enforceable. He notes, however, that there have been efforts to reach some consensus on open-source matters, including a so-called moot court held in early 2006 at the University of Washington that produced legal briefs and helped establish dialogues with some federal circuit judges on various open-source matters.

Create Ground Rules

While meeting with your legal representation, it also will pay to establish some ground rules for open-source use. "Some people used to rely on a simple prohibition," says Radcliffe. "That’s not realistic." Instead, he says, companies must establish rules. In his experience, those rules can vary dramatically. He knows of one "major Silicon Valley company," for instance, that has a development agreement that refers to open source as "infectious software." Others, he says, have developed entirely separate due diligence processes for dealing with open source during acquisitions. And he knows of one company that uses open source internally but prohibits it in products it makes available to customers.

The key is to give developers rules for when and how to integrate external code of any type into their projects. "What is very clear," Radcliffe says, "is that if the people who are actually doing the coding don’t have direction and some type of enforcement mechanism, they’re going to pull whatever they can off the Internet whenever they can."

Investigate Your Code

While a few years ago a claim of "we didn’t know about this open-source stuff" might have carried some weight in court or with a potential (and now unpleasantly surprised) merger partner, that’s no longer the case. Open-source products are mainstream now, not esoteric, and the responsible use of code has become a given.

Consequently, legal experts say that it’s important for companies to have a process in place for carrying out investigations into the provenance of their code. Choate’s Copenhaver, who is also a counsel for Black Duck, says that companies should establish a schedule for senior executives to be briefed on issues and possible remediation at a set time after the investigation is complete. The goal, she says, is to keep the company from feeling a need to react to incomplete findings.

The process also should involve regular meetings with developers who are found to be using free or open-source code without properly following licenses, she says. These developers need to be made aware of the consequences of not following the rules—not just for the company, but for themselves too. "Anyone who’s had the experience of having just finished something only to have to take it all apart and re-QA it" will not want to repeat the experience, says Copenhaver.

And to keep developers from feeling the need to grab code on the sly, management needs to help them. "The problem with the fellow who says, ‘These guys can’t get their job done and worry about all this,’ is that he hasn’t built a structure to support the developers so they can get their questions answered quickly," says Copenhaver.

Getting those answers, she asserts, will be a matter of building trust between the development and legal staffs. "What we really want to get to is an honest conversation. If what you’re saying is, ‘Just say no, we don’t use any of this [open-source] stuff,’ what you’re really saying is, ‘Don’t ask, don’t tell.’ What you need to be saying instead is, ‘We can get an enormous amount of leverage and competitive advantage by making the best use possible of these available resources. But [we need to do] it fully understanding what our compliance obligations are.’"