Indian tax risk highlighted.(first in)

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Companies that have relocated functions to India may face an increase in tax if a new proposal by the Indian service tax authorities is applied. In the past, a liberal indirect tax regime has meant that services exported from India enjoyed a zero tax rating. Exported marketing and back-office support services will become subject to 12.36 per cent service tax if the authorities' new interpretation is allowed.

They argue that these services should be subject to service tax on the basis that they are not "used" outside India--zero-rated services must be provided from India and used outside India. This may affect businesses that use an Indian-based back-office support function and those that use an Indian entity to market their products in India, according to tax experts at KPMG.

They are warning relevant businesses to put in place adequate mechanisms to avoid protracted litigation. These may include reviewing existing documentation to ensure that it clearly reflects the nature of activities undertaken in India and, if this is the case, supports their contention that the services are used outside India. Indian tax authorities and courts place emphasis on documents such as contracts, agreements, invoices, correspondence and e-mails. Companies should consider developing standard operating procedures that outline in detail the ...